On Friday, Monster Beverage (MNST) reported a blowout quarter and the stock rose 12%. Revenue rose sharply, but is that enough to drive the stock higher?
Monster Beverage reported first-quarter revenue increased 8.5% to $680.2 million and the company earned $0.79 per share in earnings. The consensus analyst estimate was looking for revenue of $657 million in revenue and EPS of $0.74. But analyst estimates are easy to beat, since the company doesn't give guidance and there is a huge spread in estimates.
As part of an asset swap, Coca-Cola (KO) paid $2.15 billion to acquire a 16.7% stake in the company, which allowed Coke to become Monster's preferred distributor. Since the deal was signed, investors believed the company would return that money to shareholders. Sure enough, management announced it would purchase up to $2 billion worth of shares through a Dutch auction tender offer.
While the quarter was better than expected, the company's top-line revenue is slowing down. In fact, sales in the U.S. only grew 4.8% to $624.3 million. International revenue was up 30.8%, but only accounts for 27% of total sales.
Investors believe the deal with Coca-Cola will accelerate sales. With Coke's help, the company should be able to expand its geographic reach, including a full frontal attack on China and a re-launch in India. Analysts see growth picking up to 13% this year, but Monster's top line hasn't increased that fast since 2012, when the company grew 21%. Last year, revenue grew just 8.8%. Likewise, analysts believe the company can expand gross margins to 64.1% by 2017 from 59.4% in fiscal 2015.
But is that really going to happen? Gross margins are supposed to increase by 471 basis points and growth is supposed to accelerate to 13% from 8.8%. Aided by the Dutch auction, and a healthy share buyback, EPS is expected to be up 29% this year to $3.86 and up another 20% to $4.65 next year. But that's just financial engineering.
It seems as if the best quarters are behind Monster Beverage. Why else would the two founders be willing to participate in the Dutch auction? There's no guarantee Monster will be a hit in China and we haven't seen any new products take the lead in terms of sales. At the current quote, investors are paying 31x forward estimates for a company that hasn't grown revenue near 13% in four years. Toy buy the stock, you have to believe there will be a monster improvement in the business going forward.