NEW DIRECTIONAL CALL PLAYS
Monster Beverage Corp. - MNST - close: 118.89 change: +2.63
Stop Loss: 115.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.1 million
Entry on January -- at $---.--
Listed on January 17, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: Yes, see below
Why We Like It:
Shares of MNST have been extremely effervescent. Last year the NASDAQ composite rallied +13.4%. Yet MNST soared +59% in 2014. Thus far in 2015 the NASDAQ is down -2.1% while MNST is up +9.7%. The stock looks poised for more gains.
The company's market material describes MNST as, "Based in Corona, California, Monster Beverage Corporation is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company's subsidiaries market and distribute energy drinks and alternative beverages including Monster EnergyÂ® brand energy drinks, Monster Energy Extra Strength Nitrous TechnologyÂ® brand energy drinks, Java MonsterÂ® brand non-carbonated coffee + energy drinks, M3Â® Monster EnergyÂ® Super Concentrate energy drinks, Monster RehabÂ® non-carbonated energy drinks with electrolytes, Muscle MonsterÂ® Energy Shakes, ÃœbermonsterÂ® energy drinks, and Peace TeaÂ® iced teas, as well as Hansen'sÂ® natural sodas, apple juice and juice blends, multi-vitamin juices, Junior JuiceÂ® beverages, Blue SkyÂ® beverages, Hubert'sÂ® Lemonades and PREÂ® Probiotic drinks."
A big part of last year's gains in MNST came in August. On August 15th, 2014 it was announced that Coca-Cola (KO) was buying a 16.7% stake in MNST. This is part of a long-term strategic partnership to conquer the energy drink category. This generated a +20% pop in shares of MNST and the stock has been in rally mode ever since.
Earnings have been mediocre. MNST has beaten Wall Street's bottom line earnings estimate the last three quarters in a row. Yet they also missed analysts' revenue estimates those same three quarters. Revenue growth has actually been slowing down. Their Q4 2013 revenues grew +14.7% while their Q3 2014 revenue growth was down to +7.7%. Investors don't seem to care.
There has been a lot of analyst action on this name with both upgrades and downgrades in the last several weeks. So far the upgrades are outnumbering the downgrades. This past week saw Cowen upgrade MNST and give it a $140 price target.
The bears are that MNST will suffer from stronger competition from Red Bull, their main rival. They've been rival for years, so what's going to change? There is the valuation argument that MNST is too expensive with the stock trading at 36 times earnings.
Bulls can argue that MNST will see stronger growth when they make the switch to KO's global distribution system. Right now international sales only make up 22% of MNST's total revenues and MNST only has 5% of the international energy drink market. That compares to 37% of the energy drink market in the U.S. By joining KO's distribution platform it's going to give MNST a lot more exposure overseas, especially in Latin America and China. Currently MNST has zero exposure in China. There is speculation that MNST could double its market shares internationally pretty quickly.
Another bonus for MNST is the consumer spending situation in the United States. About 70% of MNST's sales come from convenience stores and gas stations. The massive drop in gasoline prices is very bullish for MNST since consumers will have more money in their pocket after filling up.
At a recent investor meeting MNST said that sales growth in the energy drink category had "re-accelerated" after three consecutive quarters of slowing sales growth (not declines, just slower growth).
There is speculation that MNST might be able to raise prices in the U.S. since their rival, Red Bull, recently raised their prices. There is also the relationship with KO as the company could up its stake in MNST to 25%. Of course they could outright buy MNST too.
The point & figure chart for MNST is bullish and forecasting a long-term $155.00 target. We are not setting a target tonight. The plan will be to exit prior to earnings in late February. The $120.00 level might be round-number resistance so we are suggesting a trigger to buy calls at $120.25.
Trigger @ $120.25
- Suggested Positions -
Buy the MAR $125 CALL (MNST150320C125) current ask $4.20
Option Format: symbol-year-month-day-call-strike