Monster Beverage’s (MNST) stock declined about 6% this past week, and market analysts are raising more red flags for its future forecast.
The UBS Group currently rates Monster’s stock as a “sell”. UBS analysts insist the stock will lose more than 15% of its value across the next year. These analysts have pinpointed a target price of $48 for Monster as it currently trades around $50. The stock was nearing the $60 mark when the UBS report came out. The fact that UBS is consistently ranked in the top 10% of stock market analysts makes the dire forecast for Monster that much more concerning.
The question begs: why are analysts so bearish on Monster? The current “sell” rating is partially attributable to the company’s perceived overvaluation. The beverage maker’s stock is currently priced at upwards of 30 times its earnings. This is quite the large multiple, considering stock market analysts far and wide agree the company’s earnings will not grow faster than 17% each year across the next half-decade.
Monster energy drinks were initially dismissed by some as a passing trend that would last for a couple years and eventually give way to the industry stalwarts or companies that sell comparably healthy caffeinated drinks. However, Monster’s offerings have become incredibly popular in recent years. Head to your local supermarket or convenience store and it is nearly guaranteed you will find several Monster beverages for sale.
Monster’s tasty concoctions spike energy, fuel the body with vitamins and prove quite satiating. They’re not expensive either — most sell for around $3 a can. The fact that most of Monster’s customers are in their teens, 20s and 30s is icing on the cake as these demographics have purchasing power that will extend far into the future. However, some market analysts believe this brand loyalty isn’t enough for investors.
According to UBS, Monster will likely endure a considerable growth decline in the near future. However, data stemming from S&P Global Marketing Intelligence shows the company has fairly strong earnings quality. Monster has a free cash flow of more than $950 million that nearly matches its trailing reported net income. These numbers do not indicate a growth slowdown. However, even if the company grows at a rapid rate, it is still priced fairly high at the aforementioned 30 times its current earnings. The question is whether you are willing to invest in a stock with potentially limited growth prospects.
It isn’t all bad news — Monster’s third quarter numbers were surprisingly impressive. The company’s stock spiked 13% this past November. The energy drink specialist revealed there is an emerging tiff with Coca-Cola, its primary distribution partner. However, investors still bought the stock last month as Monster’s third quarter results were more than 10% higher than the same quarter a year ago. All in all, the company’s quarterly sales topped the $1 billion mark. Earnings spiked 20% in this period of time, matching analysts’ expectations.
So, what does the future really hold for Monster and its investors?
Potential investors are certainly intrigued by Monster’s recent announcement that Coca-Cola is creating two new energy drinks under its own brand. These new offerings are important as they might break a contractual agreement that states Monster is to strictly focus on its energy drinks while Coca-Cola sells beverages with less caffeine. It will be interesting to see how this conflict plays out in the months ahead. If the two sides cannot get past this hurdle, there is the potential for Monster to lose Coca-Cola as a business partner. Just as concerning is the fact that Coca-Cola’s energy drinks will steal market share.
Monster’s stock has primarily gone sideways throughout the year after jumping more than 40% in 2017. The company will soon expand marketing and sales to a slew of new markets ranging from Eastern Europe to China and India. Though the United States is Monster’s top market, the company certainly has room to grow. Prospective investors are advised to sit back until Monster and Coca-Cola find a solution to their growing conflict. If the two sides reach a mutually beneficial agreement, the coast is clear for Monster to continue its winning ways, capture the international market and make investors plenty of money.