Monster Beverage Earnings: Innovation and Value Brands Fuel Top Line; Volume Upside From Bang Deal

We plan to maintain our $48 fair value estimate for narrow-moat Monster Beverage MNST after absorbing second-quarter results that matched our estimates. Sales grew 12% (or 14% on a currency-neutral basis) and EPS rose 50%, keeping the firm on track to meet our 2023 targets for sales and EPS to grow 13% and 31%, respectively. We see no reason to alter our 10-year projections for high-single-digit annual sales growth and operating margin averaging 32%. Despite our constructive view of Monster’s long-term prospects, anchored by brand intangibles and the long-term partnership with wide-moat Coca-Cola, we see the shares as expensive, trading at a 17% premium to our intrinsic valuation.

Monster’s core energy drink segment (91% of sales) grew 12% on a currency-neutral basis, outpacing the energy drink market’s 10% growth per management. We attribute this to innovation, such as Monster Zero Sugar and Java Monster Triple Shot Mocha and Vanilla, as well as expanded distribution in Europe and Asia-Pacific. We find the 26% sales growth in the strategic brands segment (5% of sales) encouraging and believe it was primarily driven by affordability brands (Predator and Fury) as the firm targets emerging-market consumers across Latin America, the Middle East, and Southeast Asia with lower price points and through the traditional trade.

Additionally, the firm confirmed the July acquisition of energy drink rival Vital Pharmaceuticals, owner of the Bang Energy brand, which has a mid-single-digit volume share in the United States. We view the deal favorably, given Bang’s brand standing in performance energy drinks, accessibility upside from transitioning to Coke’s distribution, and reasonable valuation with a purchase price at roughly 1 times sales. We plan to assess the deal’s impact on Monster’s valuation when more operational details become available in the November earnings release.