Investors and analysts are bullish on shares of Monster Beverage (MNST). Of the 18 publishing analysts on the stock, 78% rate the stock either a "strong buy" or "buy." Only four analysts are worried about the stock's valuation -- and can't bring themselves to rate the stock higher. I think there is monster disappointment ahead.
Analysts like the stock in part because the company is returning huge amounts of cash to shareholders. In June of 2015, Coca-Cola (KO) paid $2.15 billion to acquire a 16.7% stake in Monster as part of an asset swap. Coke became Monster's preferred distributor.
Investors expected most of that money to be returned to them through a buyback. But in February, Monster announced a smaller buyback than expected. The company said it would authorize a $1.75 billion buyback, which includes the remaining $250 million under its current authorization. Investors were under the assumption the company would chug down over $2 billion worth of stock.
Investors also believe the distribution deal with Coke will drive faster sales, both domestically and internationally. But, so far, there is little evidence the company's growth rate has increased. After the deal was completed, Monster missed forecasts in the second quarter of fiscal 2015, while it transitioned to Coke Cola's distribution system. Revenue grew just 0.95% that quarter and jumped 18% the next quarter. Monster finished 2015 with just 8.8% revenue growth, which was the company's slowest growth rate ever. Analysts think growth will pick up to 12.3% this year, but Monster's top line hasn't increased that fast since 2012, when the company grew 21%.
Since the company doesn't give guidance, analyst projections are all over the place. Just look at the current revenue estimates: The low estimate is looking for revenue of $2.88 billion, up 7.5%, while the high estimate is forecasting 17% growth, to $3.15 billion. The consensus seems to have settled on 12% revenue growth.
I think Monster will only grow the top line revenue between 8% and 9% this year, not 12%. Worldwide growth of energy drinks has been slowing for years. According to data provider Statista, energy drink sales in the U.S. grew just 4.9% in 2014, down from 17.2% in 2011.
Even though revenue is slowing, because of the buyback, earnings per share will take off. The consensus thinks earnings will increase 20% -- from $3.84 in 2016 to $4.62 next year.
And because of the deal with Coke, analysts believe Monster will dramatically expand its operating margin. Right now, investors believe operating margin will go from 26% in 2013 to as high as 42% in 2017. That seems pretty far-fetched. Back in 2013, the company only grew revenue 9%, so it's unlikely operating margins will expand past last year's 34%. The closer you look at the analyst estimates, the more questions it raises.
Monster reports after the market close around May 5. Analysts are expecting earnings of $0.75 on revenue of $657 million.
I know investors are bullish on the stock, but I think there is Monster disappointment ahead.