Brand Strength to Offset Monster Beverages (MNST) Cost Woes?

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Monster Beverages Corporation MNST remains well positioned for long-term growth on the back of continued momentum in the energy drinks business and various product launches across domestic and international markets. Driven by these factors, it reported a better-than-expected top line for third-quarter 2021. Net sales of $1,410.6 million improved 13.2% year over year.
The Zacks Rank #3 (Hold) stock has gained 6% in a year’s time compared with the industry and the Consumer Staples sector’s growth of 8.1% and 6.9%, respectively.

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Factors Driving the Stock

Monster Beverages has been long witnessing persistent strength in the energy drinks category, which has been driving its performance. In third-quarter 2021, the Monster Energy Drinks segment’s net sales advanced 14.3% year over year to $1.33 billion. Sales for the company’s energy brands, including Reign, rose 4.3% for the same period. Management is optimistic about strength in the energy drinks category and significant growth in the Monster Energy brand. Product launches across the Monster family will drive the company’s overall top and bottom lines.
It remains committed to product launches and innovation to boost growth. In the third quarter, the company launched Monster Zero Ultra in Paraguay, Monster Energy Zero Sugar in Peru, Monster Ultra Fiesta Mango in Puerto Rico and Monster Ultra Watermelon in the Caribbean. It also introduced Monster Pacific Punch, Monster Dragon Tea Peach, Reign Orange Dreamsicle, and Reign Mango Magic in Brazil and envisions launching all these products across the United States within the first half of 2022. In Australia, Monster Beverages launched Mother Sugar Free Raspberry and Monster Ultra Fiesta Mango. In Japan, it launched Monster Super Fuel, Blue Streak, and Red Dawg in July, while Monster Rossi was relaunched in October. In Canada, the company introduced three flavors in the Monster Energy Rehab line in July.
In the third quarter, Monster Mule, Monster Nitro and Monster Assault were launched in EMEA, while Predator malt-flavored energy drink was introduced in Nigeria. Also, the company introduced Ultra Fiesta, Juiced Monster Monarch and Predator in a number of countries. It expanded Predator Gold Strike to Mexico by launching a 355 ml slim can in the quarter under review. Monster Beverages also launched two flavors, watermelon and white pineapple, in its New Reserve line of Monster energy drinks in October.

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Hurdles on the Way

Despite these upsides, the company continues to grapple with shortages in aluminum can requirements in the United States and EMEA, owing to a higher cost of importing aluminum cans and elevated aluminum commodity pricing. Monster Beverages is also witnessing delays in the procurement of certain ingredients, both domestically and internationally. This has led to heightened challenges in meeting the increased consumer demand in North America and EMEA in the third quarter.
Increased cost of importing aluminum cans and higher logistics costs dented third-quarter margins. Gross and operating margins contracted 320 and 530 basis points (bps), respectively, for the said quarter.
Management has taken steps to source additional quantities of aluminum cans in excess of its contracted volumes from the United States, South America and Asia. It has also entered into supply agreements with two suppliers of aluminum cans in the United States, which are anticipated to be operational in fourth-quarter 2021.
Yet, Monster Beverage is facing freight inefficiencies, port congestion, and insufficient co-packing capacity and delays. It is experiencing elevated ingredient and other input costs, including shipping and freight, labor, trucking, fuel, co-packing fees, secondary packaging materials, and increased outbound freight costs.
It expects challenges related to supply constraints in the aluminum can industry, shortages of shipping containers, global port congestions, and higher freight and input costs to continue for the next few months. This will continue to adversely impact gross margin rates.

Conclusion

Monster Beverages appears to be in good shape despite the industry challenges, driven by the introduction of innovative products across the Monster family to suit consumers’ needs. The company has also undertaken actions to meet demand shortages, whose effects are yet to be seen.

Stocks to Consider

We have highlighted some better-ranked stocks from the broader Consumer Staples space, namely, Albertsons Companies ACI, Helen of Troy HELE, and Procter & Gamble PG.
Albertsons currently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 37.6%, on average. Shares of the company have surged 124.8% in a year’s time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for sales for Albertsons’ current financial year suggests growth of 3.6%, while the same for earnings per share indicates a decline of 16.7% from the year-ago period. ACI has an expected long-term earnings growth rate of 12%.
Helen of Troy presently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 19.8%, on average. Shares of the company have gained 19.5% in a year’s time.
The Zacks Consensus Estimate for Helen of Troy’s sales and earnings per share for the current financial year suggests a decline of 15.9% and 16.2%, respectively, from the year-ago period. HELE has an expected long-term earnings growth rate of 8%.
Procter & Gamble, a Zacks Rank #3 stock, has a trailing four-quarter earnings surprise of 5.3%, on average. Shares of the company have gained 9.9% in a year’s time.
The Zacks Consensus Estimate for Procter & Gamble’s sales and earnings per share for the current financial year suggests growth of 3.2% and 1.2%, respectively, from the year-ago period. PG has an expected long-term earnings growth rate of 6.7%.

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