One quarter does not make or break a company. Any business, even one that ranks among the world’s best, can deliver a poor quarterly report for a variety of reasons. However, occasionally a company’s quarterly report will contain a troubling development that investors would be wise to not overlook.
That just might be what’s happening in the case of Monster Beverage Corp (NASDAQ:MNST), whose disappointing quarterly results missed analyst expectations and sent the stock down more than 5% on the day.
A rough quarter in review
Monster reported 7% sales growth and $484 million in total revenue, well below analyst expectations, which were pegged at more than a half billion in revenue. Over the past few years, Monster Beverage Corp (NASDAQ:MNST) had been able to realize sales growth in the double digits, so the top line result was surely a disappointment.
Also disappointing was the surprise decline in profits year over year. GAAP earnings clocked in at $0.37 per share for the first quarter, representing a 10% decline year over year.
The twin giants of the beverage industry, The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP), while not under any current threat of litigation, are experiencing a similar problem. Volumes of their namesake sodas, which still account for large percentages of each company’s respective sales, are stagnating as consumers reach for healthier beverages.
In fact, at this point I would contend that the social stigma regarding the beverage offerings from all three companies represent the biggest, clearest threat to their businesses.
Beware the health-conscious consumer
I’ve written critically of The Coca-Cola Company (NYSE:KO) in the past for refusing to budge when it comes to its product offerings. Whereas Pepsi has embraced the consumer push for healthy food and drink alternatives, with products including its Baked Lays chips and Quaker oats, Coca-Cola has dug in its heels as a purely soda company.
To that end, Coca-Cola’s sparkling beverage division, which includes such brands as Coca-Cola and Sprite, account for roughly 75% of the company’s sales. On the other hand, PepsiCo, Inc. (NYSE:PEP)’s revenue is evenly split between food and beverages. In total, Pepsi has 22 brands that each bring in at least $1 billion in annual sales.
Monster Beverage Corp (NASDAQ:MNST) is entirely reliant on its energy drinks, and if the legal expenses continue to mount and the company’s products continue to receive scrutiny from consumers, bad things might be on the horizon.
It’s undeniable that the consumer is finally paying attention to the alarming obesity rates in the United States. And considering that Monster energy drinks have more dubious health consequences than soda, investors would be wise to monitor the company’s situation closely going forward. Add in the fact that consumer tastes can change rapidly, and it seems like a tenuous environment for Monster Beverage Corp (NASDAQ:MNST).
Investors shouldn’t immediately jump to the conclusion that energy drinks are going to disappear. But for a company that at one point produced 30% quarterly sales growth year over year like clockwork, to all of a sudden post pedestrian revenue growth and actually report a profit decline, the warning signs can’t be ignored.
Coca-Cola and Pepsi offer much more established, global brands with long histories of reliable cash flows. In addition, both stocks offer solid 2.7% dividend yields at recent prices. In short, the risk level of Coca-Cola and Pepsi isn’t anywhere near Monster Beverage Corp (NASDAQ:MNST)’s, and as a result, investors interested in the beverage industry should prefer the twin industry titans.
The article Troubling Results From Monster Beverage Underscore a Broader Industry Problem originally appeared on Fool.com and is written by Robert Ciura.
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