Analyst Note| Nicholas Johnson, CFA |
The bandwagon of bulls in narrow-moat Monster’s camp has only gotten fuller in recent months, as many investors have become increasingly enamored with its innovation slate and the attendant growth prospects. With this as the backdrop for its second-quarter earnings print, the firm showcased commendable execution, culminating in modest beats on the top and bottom lines relative to FactSet consensus. Still, while the firm’s business has been inoculated from the broader economic disruption wrought by the pandemic, the same cannot be said of the rampant logistics and raw material inflation plaguing its industry. Profitability (particularly gross margin) remains challenged, and at least for now, the light at the end of the tunnel seems more like a flicker. We plan to raise our $76 fair value estimate by a low- to mid-single digit percentage, reflecting time value along with vibrant consumer demand, slightly offset by near-term margin pressure, but the shares still aren’t a bargain. Despite a growth profile that is unparalleled across soft drinks, and which has accelerated during COVID-19, the long-term assumptions embedded in its valuation continue to stretch credulity, in our view.