Monster Beverage Corp. (MNST, Financial) produces and distributes energy drinks, soft drinks and natural beverages.
Founded in 1935 as Hansen's Natural Soda, the Corona, California-based company rebranded in 2012. Monster Beverage is the second-largest energy drink maker in the world behind Red Bull and has market share of about 26%. Some of the company's brands include Monster Energy, Monster Ultra, Monster Hydro, Monster Java, Monster Rehab, Monster Maxx, NOS, Full Throttle, Burn, Mother, Relentless and Reign. The company is also known for sponsoring various sports and music events, such as NASCAR, UFC, X Games, MotoGP and the Rockstar Energy Mayhem Festival.
With a 43.63% compound annual growth rate, Monster Beverage was one of the best-performing stocks of the past two decades. In the last 12 months, shares have gained an impressive 16.81% amid macroeconomic challenges.
The company, however, is facing new challenges today, which need to be evaluated to determine its investment potential.
Consumer spending headwinds
Although Monster Beverage faced inflation-related challenges that impacted its 2022 performance, the company has shown resilience, which is a testament to the underlying strength of its core business.
In the first quarter, the company returned to its path of double-digit revenue growth. Gross profits also trended in the right direction, indicating Monster’s scale advantages are helping it survive high inflation rates. The increase in gross profit can be attributed to pricing actions, decreased freight costs and declining aluminum costs.
Monster has recorded significant growth across geographies and categories in recent years. According to Nielsen reports, the company maintains market share leadership in the energy drink category in the U.S., with a strong performance in both the 13-week and four-week periods that ended April 22. For the 13 weeks, sales in the energy drink category, including energy shots, increased by 12.7% compared to the same period a year ago. For the 4 weeks, Monster's energy brands achieved an 11% increase in sales in the convenience and gas channel. One notable aspect is the company's implementation of pricing actions in the U.S. and international markets to address cost pressures and mitigate inflationary pressures.
However, overall consumer spending in the U.S. seems to be showing signs of weakness. Recent reports indicate consumer spending only edged up by 10 basis points last month, falling short of the 0.2% increase forecasted by economists. This slowdown is reflected in various sectors, with spending on goods, particularly those purchased on credit, experiencing a notable drop. Motor vehicle outlays and spending on gasoline and energy goods saw substantial declines, indicating a cautious approach by consumers.
One possible explanation for this stagnation in consumer spending is the persistent issue of inflation. While the Commerce Department's data shows annual inflation rose at a slower pace last month compared to previous years, it remains higher than the Federal Reserve's target of 2%. The strong underlying price pressures have discouraged the central bank from considering a return to cutting interest rates, suggesting the inflationary environment is still a concern. This situation has likely contributed to consumers' hesitancy to increase their spending.
The sluggishness in consumer spending has potential implications for the overall economy. Economists estimate the growth rate of consumer spending in the second quarter may have slowed to around 1% on an annualized basis. This deceleration follows a robust 4.2% growth rate in the first quarter, which had defied recession fears brought about by the Fed's rate hikes. However, despite the moderation in consumer spending, other indicators, such as job gains, housing starts and durable goods orders, remain strong, indicating the economy continues to move forward.
The recent Supreme Court ruling that halted President Joe Biden's $430 billion plan to cancel student loan debt adds another layer of complexity to the outlook for consumer spending. Despite the presence of some favorable factors, like increasing wages, it remains uncertain whether these positive developments can fully offset the potential negative impact on consumer spending arising from the student loan predicament and persistent inflationary pressures.
According to a recent CNBC report, the impact of higher prices has prompted a significant number of consumers to make adjustments in their spending habits. Over the past six months, nearly 80% of consumers have reduced their expenditure on nonessential goods, while two-thirds have also curtailed spending on essential items such as groceries, utilities and gas. In the grocery category specifically, more than half of consumers are opting for cheaper alternatives like private label brands or simply reducing their overall purchases. What is particularly noteworthy is consumers anticipate maintaining these spending patterns throughout the remainder of the year. The findings of the CNBC and Morning Consult survey, which involved over 4,400 adults, reveal that two-thirds of respondents plan to continue cutting spending on essential items in the next six months, while 77% intend to further reduce their expenditure on non-discretionary goods. These figures closely align with the proportion of respondents who have already implemented spending reductions in these areas.
The prevailing trend of consumer spending cutbacks could potentially have implications for companies operating in the consumer goods industry. With consumers rebalancing their finances and reducing spending on both essential and nonessential items, it is reasonable to anticipate a potential impact on the sales and revenue of companies in the beverage sector. Specifically for Monster Beverage, the survey findings indicate consumers are actively seeking cheaper alternatives and adopting a more frugal approach to their purchases. This could translate into a decline in demand for premium energy drinks and other discretionary beverages offered by the company. As consumers opt for more affordable options or reduce their overall consumption, the company may face challenges in sustaining its market share and driving sales growth. Over the past two years, the company has experienced a significant decline in its profit margins. While there has been a moderation in some of the cost pressures in 2023, challenges persist and the growth trajectory is not on par with the levels observed before the onset of the pandemic.
Market expansion
Monster Beverage, commendably, has been actively expanding its presence in international markets, which presents significant growth opportunities. The energy drink market is still growing globally, and the company has successfully established a strong foothold in various regions. Statista expects the energy and sports drinks market to reach a value of $193.2 billion in 2023 and grow at a compounded annual rate of 5.59% through 2027.
The company achieved notable market share gains across multiple countries in the Europe, Middle East and Africa region in the recent quarter. In the Asia Pacific region, Monster Beverage witnessed overall growth in net sales, with China standing out as a particularly promising market. Impressively, China experienced a remarkable surge of 68.3% in net sales, underscoring the company's strong prospects and growing presence in the Chinese market. Additionally, Monster Beverage successfully maintained its market leadership positions in Japan and South Korea, further solidifying its foothold in these key markets. Japan is at the forefront of the energy and sports drinks market in the Asia Pacific region, leading the per capita sales volume ranking. According to Statista, the sales volume of energy and sports drinks per person in Japan stands at an impressive 10.51 liters. This indicates a significant consumer demand for these beverages in the Japanese market, highlighting the country's strong position in the non-alcoholic drinks sector.
China, although currently ranked second to last in per capita volume sales of energy drinks, presents significant growth opportunities. According to Research and Markets, the energy drink market in China is projected to reach an impressive $12.6 billion by 2027. This growth can be attributed to the increasing popularity of energy drinks among young people in China who consume them as regular beverages. Energy drinks are a relatively new type of beverage for the younger generation, but, in recent years, the importation of energy drinks to China has been on the rise. Notably, the highest consumption group comprises the youth demographic, who view energy drinks as a fashion statement and a trend. With the increasing popularity of energy drinks among young consumers in China, the market holds tremendous potential for growth.
In 2022, Monster Beverage moved into the alcohol industry through the acquisition of craft beer company CANArchy, a transaction valued at a modest $330 million. Since then, CANArchy has faced some profit challenges, but, with the support of Monster, has been able to expand its range of beverages. One notable addition to its lineup was The Beast Unleashed, a flavored malt beverage that was introduced last year. Although alcohol sales in the fourth quarter of 2022 amounted to a relatively small $26.9 million, they signify a potential high-growth market for Monster.
Additionally, Monster Beverage revealed earlier this week it is acquiring bankrupt rival drink Bang Energy's assets from Vital Pharmaceuticals in a deal worth $362 million.
Takeaway
Monster Beverage is a well-run business that is poised to grow steadily in the next five years. The international expansion of the company will be the key driver of its growth. However, at a forward price-earnings ratio of 37, the stock is not cheaply valued.
Given the looming risks in the domestic market arising from changing consumer spending patterns, investing in Monster Beverage seems like a precarious bet with limited upside potential.
