Monster Beverage Earnings: Pricing Power Seems Intact as Firm Benefits From Hikes; Shares Not Cheap

Our $43 per share valuation of narrow-moat Monster Beverage MNST should rise by a mid-single-digit percentage, largely reflecting the time value of money after the company posted first-quarter earnings that suggest it is on pace to meet our full-year targets. The company saw sales and profitability improve in the wake of recent pricing actions taken to cover rising costs with little impact to market share, a dynamic that suggests the pricing power underlying our moat rating is intact. Despite our favorable view of the company’s competitive position, we believe the shares are priced such that they assume perfect execution (particularly challenging considering that Monster is increasingly dependent on less established markets and product lines for growth).

Monster’s first-quarter sales rose 12%, spurred by 11% expansion in the core energy drinks segment. The top-line growth and normalizing freight rates contributed to the firm’s roughly 230 basis points of operating margin expansion (to 28.6%), and we expect the situation to improve further as the company works down its inventory of aluminum cans acquired from suboptimal locations at the height of supply chain challenges in 2021-22. Our full-year targets should not change significantly, calling for 12% top-line growth and around 330 basis points of adjusted operating margin expansion (to a little more than 28%).

Although management indicated that the category has softened somewhat as economic uncertainty has risen, we believe Monster should benefit from its diverse portfolio and burgeoning international scale in the event of a downturn. The energy drink category benefits from a functional orientation and low private-label penetration, and we believe Monster’s standing as a top-two brand in major markets bodes well. We continue to expect adjusted returns on invested capital to rebound into the mid-30s on average over the next five years, from 28% in 2022.