We expect Monster Beverage Corporation MNST to beat expectations when it reports third-quarter 2015 results on Nov 5, after the market closes. Last quarter, the company had delivered a negative earnings surprise of 12.22%. The company has delivered positive earnings surprises in two of the trailing four quarters.
Why a Likely Positive Surprise?
Monster Beverage witnessed a period of major transition in the first half of 2015 as the company closed its deal with The Coca-Cola Company KO in June and restructured its operating segments thereafter.
The transition included the formation of a new segment called The Concentrate segment, which includes all the brands acquired from Coca-Cola. Under this segment, Monster manufactures and supplies concentrates or beverage base to bottling partners that produce and bottle the finished product. The addition of this high-margin concentrate segment drove gross margins in the second quarter of 2015, a trend which is likely to have continued in the third quarter of 2015 as well.
Gross margins in the second quarter were driven by favorable changes in the product sales mix, higher production efficiencies and lower cost of some raw materials, particularly certain sweeteners. These tailwinds should boost results in the third quarter as well.
Monster’s revenues in the third quarter of 2015 are expected to gain traction from new products launched in the U.S in the past few quarters, solid international sales and growing momentum at the energy drink category.
However, because of its growing international presence, its sales and profits are being hurt due to negative currency translations.
What Our Model Indicates?
Our proven model shows that Monster Beverage is likely to beat on earnings this quarter because it has the right combination of two key ingredients.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.24%, as the Most Accurate Estimate of 82 cents is higher than the Zacks Consensus Estimate of 81 cents. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Monster Beverage carries a Zacks Rank #3 (Hold).
Note that stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 have a significantly higher chance of beating earnings estimates. Conversely, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Monster Beverage’s Zacks Rank #3 and +1.24% ESP makes us confident of an earnings beat this season.
Other Stocks to Consider
Other stocks in the broader food/beverage sector that have the combination of a positive Earnings ESP and a favorable Zacks Rank are:
Keurig Green Mountain, Inc. GMCR, with an Earnings ESP of +4.23% and a Zacks Rank #3.
The Kraft Heinz Co. KHC, with an Earnings ESP of +5.17% and a Zacks Rank #3.
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