Monster Beverage Corporation’s (MNST) third-quarter 2014 adjusted earnings of 70 cents per share beat the Zacks Consensus Estimate of 68 cents by 2.9%. In addition, earnings increased 31.7% year over year on the back of solid margins, better cost leverage, and a lower tax rate.
Revenues
Monster Beverage’s third-quarter 2014 net sales of $636 million lagged the Zacks Consensus Estimate of $642 million by 0.9%. Net sales, however, rose 7.7% year over year.
Revenues were affected by softer growth rates in the Energy category in both the U.S and international markets. In addition, revenues continued to be eroded by cannibalization of sales of existing Monster Energy brands like Absolutely Zero, Rehab, Import and Lo-Carb by new products such as Ultra and Muscle Monster products.
However, products like Ultra, Monster Energy Ultra Black and original Monster Green energy drink continued to do well. Some of the brands that did well in the quarter include Juice Monster, Punch Monster energy drinks and Peace Tea Line.
Net sales of the Direct Store Delivery (DSD) segment increased 7.6% to $609.9 million due to higher sales volumes of Monster Energy drinks, Ultra and Java Monster lines.
Net sales of the Warehouse segment increased 10.1% to $26.0 million due to higher sales of Hubert's Lemonades and aseptic juices.
Gross sales outside the U.S. increased 14.3% year over year to $173.2 million in the quarter. The company witnessed a 7% increase in sales in Europe, the Middle East and Africa.
Margins
Third-quarter 2014 gross margin rose 170 basis points (bps) to 53.8% attributable to a decrease in cost of some of the raw materials, particularly certain sweeteners, higher prices of 24-ounce Monster Energy brand energy drinks and Peace Tea line and favorable changes in product sales mix.
Operating income increased 25.4% to $189.9 million owing to higher operating income from international operations such as Europe, Mexico and Japan. Operating margin was 29.9%, up 430 bps year over year on the back of solid revenues and lower expenses.
As a percentage of net sales, operating expenses decreased 250 bps to 23.9%.
Monster Beverage’s legal expenses during the quarter were $4.9 million, down from $6.0 million in the prior quarter.
As a percentage of revenues, distribution costs decreased 10 bps to 4.5% while selling expenses declined 190 bps to 10.1%. The company benefited from a decline in premiums, point of sale and other marketing expenses.
Effective tax rate in the quarter was 35.6%, lower than 38.8% in the prior-year quarter, owing to profits earned in foreign subsidiaries.
Financial Update
The company ended the quarter with cash and cash equivalents of $408.3 million as of Sep 30, 2014, compared with $373.1 million as of Jun 30, 2014. During the third quarter of 2014, the company did not repurchase any shares under its existing share repurchase program.
Deal with The Coca-Cola Company
In Aug 2014, Monster Beverage entered into a deal with The Coca-Cola Company (KO), which includes the sale of an equity stake and swapping of some brands with the cola giant. Under the long-term strategic deal, Coca-Cola will acquire approximately 16.7% equity stake in the energy drink maker for $2.15 billion in cash. The transaction, expected to close in early 2015, is awaiting regulatory and customary approvals.
Monster Beverage carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the industry include Barfresh Food Group Inc (BRFH) and True Drinks Holdings, Inc. (TRUU). Both the companies carry a Zacks Rank #2 (Buy).
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