Tuesday, November 06, 2012

Monster Beverage's Stock Needs Caffeine Jolt

Although Monster Beverage’s (MNST-$45.50) net sales in the second quarter grew by 28.2% to $592.6 million, gross profit fell 100 basis points to 51.8% due to a 31.9% increase in promotional allowances. Given the frenzied elbowing for domestic share, gross margins at Monster in coming quarters will likely decelerate further.
Although management will deny it, recent adverse publicity due to the Food and Drug Administration launching an investigation into five deaths allegedly tied to Monster Energy drinks means the company will need to improve its “public image.” Ergo, to get in front of a public debate whose aim would be to restrict sales of energy drinks to minors and/or regulate caffeinated-energy drinks, look for Monster to increase the budgets for two line items that fall under operating expenses: merchandise displays and direct/advertising – pressuring net operating margins well into next year.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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