Welcome to the Stock of the Day on this Halloween Day!
To get into the spirit, today we’re going to revisit Monster Beverage (MNST). Lately, the company has been hampered with legal issues surrounding the high caffeine and sugar content of its namesake energy drinks. So MNST has become one of the most shorted stocks in the S&P 500. But with analysts expecting double-digit sales and earnings growth for its upcoming earnings announcement, could MNST shares be on the cusp of a turnaround?
Monster Beverage is behind the popular line of Monster Energy and Rehab drinks. The company used to be known as Hansen Natural, but changed its name and ticker symbol to reflect the growing popularity of Monster energy drinks. This represented a major facelift for the company, which has been in business since the 1930s. The remainder of the company’s product roster is actually very wholesome, with 30 real fruit and spice soda flavors, a number of immune system-boosting drinks, vitamin waters and an array of teas and lemonades. Unfortunately, last year’s publicity setbacks haven’t gone away; last quarter regulatory issues saddled Monster with $5 million in extra costs.
Monster Beverage is scheduled to announce third-quarter results after the closing bell on November 7. As I alluded to earlier, the analyst community forecasts 11.1% annual sales growth and 21.3% earnings growth. This is while earnings are expected to be flat for the rest of the Soft Drinks industry.
However, I’m skeptical of these estimates. For the past several quarters running, Monster has managed to miss the consensus earnings estimate each and every time. Additionally, the fact that analysts have lowered their consensus EPS estimate by 2 cents per share, or 3%, over the past few months doesn’t inspire confidence. It’s possible that Monster Beverage will beat estimates, but the downward revisions suggest a different outcome.
In the energy drink market, Monster Beverage’s only real competitor is privately-held Red Bull. When it comes to the company’s offerings of juices and vitamin waters, Monster Beverage’s rival is PepsiCo (PEP). And when you run the two companies through Portfolio Grader, it’s clear who the winner is: PEP is currently a B-rated Buy.
In addition to enjoying superior institutional buying pressure (as shown by its B-rated Quantitative Grade), PepsiCo is stronger in terms of its track record of beating analyst estimates, operating margin growth and earnings momentum. Add to the fact that PEP yields 2.7% right now (while MNST has no dividend to speak of), and there’s no question which is the better buy right now.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Since winter 2012, this stock has fallen in the ranks in Portfolio Grader. While MNST was a B-rated Buy as of last December, it has fallen to a C-rated hold since then. Currently, the stock is struggling to attract institutional investors, so buying pressure has deteriorated to the point where MNST receives a C for its Quantitative Grade. Meanwhile, there is plenty of room for improvement in terms of this stock’s fundamentals. Of the eight fundamental metrics I graded this stock on, MNST pulls off decent grades for just cash flow (B) and return on equity (A). Meanwhile, the other six variables are C-rated, like its sales and earnings growth, or D-rated like its earnings surprises track record. So MNST receives a C for its Fundamental Grade.
As of this posting, I consider MNST a C-rated Hold.