Monster Beverage’s Brand Resonance on Display in Q4

We don’t expect a material change in our $85 fair value estimate for narrow-moat Monster Beverage MNST after incorporating weaker-than-expected fourth-quarter results. We continue to view Monster’s shares as overvalued, trading at a 15% premium even after a 4% drop in post-market trading.

Monster’s fiscal 2022 sales totaled $6.31 billion (up 13.9%, including $239.5 million of unfavorable foreign currency movement) and its EPS was $2.23, both a tad below our $6.4 billion and $2.26 respective forecasts. Nonetheless, we are encouraged to see healthy consolidated unit growth for the year (14.4%) considering the 6% price increase (implemented on Sept.1) in the U.S., where Monster generates most of its sales.

Encouragingly, Monster announced plans to bring additional innovation (including a malt beverage alcohol, unflavored water, and wellness energy drinks) to market through the incremental shelf space it has secured across different channels. From our vantage point, this highlights Monster’s strong brand strength and the valued position it has built with shoppers and retail partners (basis of our narrow moat rating). However, we aren’t blind to the effect of the confluence of cost inflation (across its key ingredients, inputs, and co-packaging) and supply chain challenges (while moderately improving) on the business. In this context, Monster’s full-year operating margin deteriorated by 730 basis points to 25.1%. Still, we expect cost pressures to subside gradually as the environment normalizes, and Monster depletes higher-cost imported can inventories in the coming quarters. We maintain our long-term forecast of high-single-digit average top-line growth and 34%-35% operating margins.