MNST – Category Softness and Higher Expenses Drive EPS Miss

MNST reported Q1 ’13 EPS yesterday evening, and if earnings season was a punch bowl, MNST would be an unwelcome addition to that receptacle.



The company missed on sales and EPS, against some admittedly very difficult comparisons, but comparisons don’t get any easier until 2H so we are staring down one more quarter of potentially similar quality before the optics improve on the earnings results.



We expect that the stock will trade below $50 per share this morning (versus a close near $57).  We see potentially one more quarter of EPS weakness relative to consensus (depending on where that shakes out over the next couple of days).  We start to get interested in MNST closer to $45 for investors with longer durations.

 

What we liked:

  • International sales grew 29.9%, taking up some of the slack for domestic top line weakness (profitability of sales outside the U.S. is an open issue)
  • Within a softer category, MNST continues to take share (category +2.8%, 13 week, all channel, MNST +7.1%, Red Bull +9.5%)
  • Even with potential negative incremental news flow, we continue to believe that virtually all of the lawsuits, etc. are just noise

What we didn’t like:

  • Missed EPS ($0.37 reported versus consensus of $0.46)
  • Sales growth of 6.5% (against a very difficult comparison, but Q2 is more difficult on a one-year basis, substantially easier on a two-year)
  • 13 week category numbers for all outlets increased just 2.8% for the energy drink category, including energy shots,  and Red Bull’s sales growth outpaces MNST
  • Gross margin declines of 100 bps
  • No leverage on sales growth – EBIT declined 15.0% on the modest sales growth number – impact by some one-time costs, but even adjusted no operating leverage
  • Despite significant growth in international markets, management commentary suggests that the energy drink category has slowed in some markets outside the U.S.
  • Negative news flow surrounding company’s products likely to continue

Bottom line, we are going to stay on the sidelines unless price becomes compelling (closer to $45) or consensus moves closer to our estimates for the next quarter.

 

Call with questions,

 

Rob

 

Robert Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst


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