Energy drinks maker Monster Beverage Corp (NASDAQ:MNST) seems to have lost some of its growth momentum. Investors have always perceived this company as a fantastic growth proposition and have not been disappointed in the past. Monster has returned around 62.5% in share price appreciation over the last two years while the S&P 500 has only returned around 17.16%.
Things have been a little quieter of late, however. The company’s recent first quarter report was quite lackluster, leading to a sharp 12% decline in stock price. Let’s take a look and see what is going on behind the numbers.
The earnings fall
Not only did the company miss analyst expectations, but it also reported a 17% decline in net income from the prior-year quarter. Monster’s net income came in at $63.5 million or $0.37 per share, down from $76.1 million or $0.41 per share last year. This drop was on the back of a 6.5% increase in revenue to $484.22 million, while Wall Street analysts expected revenue of $501.74 million.
Earnings were mainly impacted by $3 million in legal expenses, $8.3 million distribution costs and $4.7 million from an unfavorable currency effect.
Slowing demand
The energy drinks sector was posting double digit growth till last year, far ahead of the overall beverage industry. Now, however, it is experiencing a slowdown. The segment grew 14% in 2012 according to industry newsletter Beverage Digest, which was slightly lower than its 17% growth in 2011. This year’s decline will be much heavier, however, if the sales pattern of the first half of the year is any indication.
Monster Beverage Corp (NASDAQ:MNST)’s management pointed out during its first-quarter earnings call that dollar sales of energy drinks grew by just 2.8% year-over-year, according to Nielsen data for the 13-week period ending Apr. 27. This comes after a moderate 5.7% growth in the 13-week period ending Feb. 16.
The negative press and lawsuits are weighing heavy
The slowdown is mostly attributed to the ongoing campaigns against the high caffeine content in energy drinks, campaigns which are tarnishing the image of the sector in general as well as those of the energy drink makers.
The highly-publicized lawsuits against energy drink makers are adding to the trouble. This damage the lawsuits are causing goes far beyond the legal costs that are denting profits; they are hurting the brand name and investor confidence as well.
Only last week was Monster Beverage Corp (NASDAQ:MNST) sued by the San Francisco city attorney for promoting its drinks to adolescents, and the FDA is investigating several reports where energy drinks have been mentioned in connection with fatalities. As of Mar. 6, there were 8 reports being investigated that mentioned Monster, 13 that mentioned 5-Hour Energy, and 1 that mentioned Rockstar Energy.
Red Bull has scored a point
Privately-held Red Bull and Monster Beverage Corp (NASDAQ:MNST) are the two leading energy drink makers in the US. While the demand slowdown has affected both companies, Red Bull has fared much better.
The company was able to grow its sales by 9.5% in the 13-week period ending April 27, compared to Monster’s 7.1% increase. Red Bull has recently launched new flavors and is actively promoting them to further increase sales.
What is significant is that Monster has lost market share by 1 percentage point during this period, a figure that exactly coincides with Red Bull’s gains. Before the trend catches on, Monster will need to come up with new products and strategies to hold its market.
Market share comparison
| Monster | Red Bull | |
|---|---|---|
| 13 weeks through April 27, 2013 | 32.90% | 35.90% |
| 13 weeks through February 16, 2013 | 31.90% | 34.90% |
Data Source: Nielsen
On a positive note
To its benefit, Monster is currently in an international expansion mode. The company entered Romania and Albania last month and is gearing up to enter India shortly. Energy drinks are a relatively new concept in a number of markets, and the company has a huge growth potential while expanding there.
Sales from Europe, the Middle East and Africa grew 34% year-over-year in dollar terms. The company is currently building plants in Japan, Korea, and India, with Japan being a focus area for the company as a result of growing sales volumes.
Bigger players on the smaller turf
Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) are also trying to expand their presence in the energy drinks arena. Both companies are developing their alternate beverage businesses to help counter falling soda sales volumes in the US. Energy drinks have always been a good opportunity on account of its growth potential, so they are natural expansion targets.
PepsiCo’s Amp energy drink has around 3% market share, while Coca-Cola’s Full Throttle has around 1%. Both brands are currently experiencing lower sales in dollar terms as a result of the US sales slump, though it is more pronounced in case of AMP, which saw a 20% decline during the 13-week period ending Apr. 27, while Full Throttle only saw a 3% fall.
Coca-Cola has recently reported earnings of $0.46 per share on revenue of $11.04 billion, while PepsiCo has earned $0.77 per share on revenue of $12.58 billion. Both companies fared better in newer markets than in the home turf.
Last thoughts
Energy drinks have always been a high-growth sector, and even now industry researchers like Packaged Facts estimate that the $12.5 billion energy drink market will grow to about $21.5 billion by 2017. Investors should be careful, however, and need to keep an eye on how the demand scene actually progresses. If Monster’s trends continue along the lines of what we saw in the first quarter, the stock may quickly lose its appeal.
The article Is Monster Losing Its Energy? originally appeared on Fool.com.
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