Surge in sales may deliver a jolt of energy to Monster earnings

Even though the U.S. economy now seems to be getting back on track, it isn’t unusual to see some people working two jobs – or even three – just to keep up with their financial obligations. No wonder, then, that sales of energy drinks are booming, as they try to keep up with their hectic schedules. Among the myriad offerings prominently displayed on the beverage shelves in gas stations nationwide, you may well have spotted the distinctive black cans with the vivid splashes of color containing the Rehab brand of energy drinks launched last year by Monster Beverages (MNST.O). Since being rolled out by Monster in the first quarter of 2011, Rehab has become the most successful brand in Monster’s portfolio, boosting the company’s revenues by over 30% in 2011 even as it delivers a jolt to consumers’ flagging energy levels.

Rehab’s success is one reason Monster’s earnings appear likely to be even stronger than expected, making the company the next in a series of ten U.S. companies that the StarMine research team believes will either beat or miss analysts’ earnings estimates when reporting first-quarter results. Monster, which is scheduled to announce its first-quarter earnings on May 7, 2012, has a positive Predicted Surprise of 2.6%. That is an early indicator that the company may beat the “street” estimates when it reports its actual results.

Monster’s cash flows from operation (CFFO) have been strong, topping $100 million in each of the last three quarters. In all three periods, CFFO also exceeded the company’s net income (which set new records). In the chart below, the green section of the bars represents the amount by which CFFO exceeded net income; whenever a company’s earnings are backed by strong cash flows, that tends to signal that those earnings are likely to be sustainable in the future. The chart on the right shows how Monster’s annual revenue have grown tenfold over the last eight years, a period during which analysts say the company has captured market share from its major rival, Red Bull. Both companies are likely to benefit from the increasing reach of energy drinks in the coming years, although the battle between them for every percentage point of market share is only likely to intensify.

The I/B/E/S consensus estimate for Monster’s first quarter earnings has increased from 34 cents a share just three months ago to 38 cents a share today. The SmartEstimate is even higher, at 39 cents a share. Since February, six analysts who follow the beverage business and Monster in particular have raised their forecasts for the company’s earnings; only one has cut his estimate (and then, only by a penny a share.) In the chart below (in which the blue line represents the SmartEstimate while the gold line represents the consensus forecast), one can see that the SmartEstimate has been leading the forecasts higher since February.

Monster’s operating profit margin now stands at 27%, much higher than the median for the beverage industry, which is currently 15%. Monster’s margins are monster-sized because of its premium prices; convenience store owners are willing to allocate more shelf space to the drinks because they make a greater profit on each can sold than they do from the sale of other, lower-priced beverages. That’s a profitable pattern, and one that is likely to ensure that Monster will win even further shelf space and brand awareness. But investors likely won’t need to wait for that to happen to celebrate some good news; the positive Predicted Surprise of 2.6% leads the StarMine research team to believe that the company will beat analysts’ estimates when it reports quarterly earnings next month.

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