Monster Beverage Corp (MNST): 3 Reasons This Company May Continue Missing Estimates

What’s the real value here?
I’m sure Monster investors were more than a little worried when CEO Rodney Sacks admitted, “the growth of the energy drink market in the United States has softened from previous quarters.” However, if they are looking for Monster to meet earnings projections, they should be more concerned about the company’s gross margin and share repurchases.

The combination of higher promotional expenses and lower per case pricing, contributed directly to Monster’s gross margin dropping from 52.3% last year to 51.7%. Relatively speaking, Coca-Cola’s gross margin of 59.60%, and Dr. Pepper Snapple’s margin of 59.23% both soundly beat Monster. Even PepsiCo’s gross margin of 51.62% is very close, though the company has lower margin businesses than Monster. If PepsiCo focused solely on beverages, their gross margin would be higher.

Lower margins are never a good thing, but Monster’s use of its cash and investments is even more troubling. Over the last year, Monster’s cash and investment balances have dropped from $793.81 million to $340.95 million. I would suggest this greater than 55% drop, argues heavily that the company won’t be able to continue retiring shares at the pace they did in the last year.

While none of the other beverage stocks look cheap relative to their growth rates, they all have dividends that should help prop up their shares. Coca-Cola pays a 2.79% yield, PepsiCo pays 2.76%, and Dr. Pepper Snapple pays 3.28%. It’s true that Monster’s projected EPS growth of 19% is far better than Coca-Cola at 8.95%, PepsiCo at 7.27% or Dr. Pepper Snapple at 5.85%, but will this growth occur?

I would argue that 19% EPS growth is likely out of reach for Monster. The company is heavily reliant on the U.S. beverage industry, and has admitted softer demand. Higher promotional spending, and curtailed share repurchases, will likely spell lower EPS growth. Investors need to temper their expectations for this Monster, or continued earnings misses might take a bite out of their portfolio.

The article 3 Reasons This Company May Continue Missing Estimates originally appeared on Fool.com and is written by Chad Henage.

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