Few companies can claim better long-term success stories than Monster Beverage (NASDAQ: MNST). The company has created an energy-drink empire from scratch, attracting the attention of major beverage giants. Yet lately, the company has seen things slow down, and coming into Thursday's third-quarter financial report, Monster Beverage investors wanted the beverage maker to prove that it could still grow its bottom line at an impressive rate.
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Monster's results were far from bad, but they nevertheless didn't live up to the growth expectations that investors had for it. Let's take a closer look at how Monster Beverage did and whether better times could be ahead.
Promotional activity is a key part of Monster's brand-building. Image source: Monster Beverage.
Monster Beverage needs a recharge
Monster Beverage's third-quarter results didn't have the energy that investors have come to expect from the company. Revenue was up just 4%, to $788 million, which was well short of the consensus forecast among those following the stock, for roughly $820 million. Net income rose a more respectable 10%, to $191.6 million, and that produced earnings of $0.99 per share. However, that number didn't compare favorably with investor expectations of $1.12 per share.
Taking a closer look at Monster's numbers, Monster didn't hesitate to point out that last year's third-quarter results were juiced higher by an anticipated price increase on certain energy-drink products. That pulled some revenue into last year's third quarter, and Monster estimated the amount at $11 million of net sales, or roughly 1.4 percentage points.
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Meanwhile, the impact of currency pressure on its overall sales has almost disappeared. The company said that unfavorable currency exchange rates only cost it about $2.6 million in net sales, down from more than $12 million in the second quarter of 2016.
Once again, Monster's international performance outpaced its domestic results. Monster said that sales outside the U.S. made up $190.8 million in revenue, up by almost an eighth compared to year-ago figures.
From a segment-by-segment perspective, Monster saw modest strength across the board. The Monster Energy drinks segment, which also includes the Mutant Super Soda product, saw revenue climb to 3.4%. Meanwhile, the strategic brands segment, which includes former Coca-Cola (NYSE: KO) energy-drink brands, posted sales gains of 3.2%. Moreover, the new segment for other revenue posted sales of $5.7 million, representing sales of products of American Fruits & Flavors that are sold to independent third parties.
Operationally, Monster fared reasonably well. Gross profit margin climbed strongly, but a rise in general and administrative expenses hurt the company's operating income. The company's tax rate fell sharply during the period, reflecting a one-time tax benefit. Case volumes climbed slightly, to 82.8 million cases, and average net sales per case climbed to $9.45.
What's ahead for Monster?
Monster Beverage CEO Rodney Sacks once again made most of his comments about internal operations, especially its strategic alignment with various Coca-Cola bottlers internationally. "We commenced the launch of Monster Energy drinks in China," Sacks said, "beginning with Beijing in September and Shanghai and Hunan Province in October." The CEO believes that Monster will keep making moves for the rest of the year and throughout 2017 to boost its presence in China. In addition, distribution in the U.S. market has seen improved quality, and the Mutant Super Soda is doing well early on in its product cycle.
One thing that investors will want to watch closely is a pick-up in costs related to regulatory matters and litigation. For now, the $4.9 million that Monster spent in the third quarter isn't worthy of too much concern, but it did rise by nearly half from year-ago levels. With the beverage industry broadly seeing more attention from regulators and consumer advocates, Monster will have to work hard to control risk.
Investors in Monster Beverage weren't pleased with the slowdown in the company's growth rate, sending the stock down about 5.5% in after-hours trading following the announcement. In order to make long-term investors more comfortable with the stock, Monster will have to find ways to stoke its growth and get things moving more aggressively in the right direction.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.