Evan Morris of Bank of America Merrill Lynch initiated coverage of Monster Beverage Corporation MNST with a Neutral rating and price target of $144.
Growth Story Priced Into Stock
Morris believes the company is “one of the better growth stories within consumer staples, driven by category growth in its core markets and potential for international margin and geographic expansion as it further integrates into The Coca-Cola Co KO global bottling network.”
However, this growth story already appears to be priced into the stock, given its current premium valuation, while sales are likely to continue to be volatile in the near term, as Monster Beverage transitions to Coca Cola’s distribution system.
Consequently, Morris sees limited multiple expansion opportunity in the near term, with only modest upside potential.
International Opportunities
According to the Bank of America report, “The KO transaction creates opportunities to improve margins and expand its geographic presence. Expanding international margin appears to be a key pillar of the bull case.”
Although using Coca Cola’s system would mean less capital requirements, Morris believes the real margin upside would be driven through higher volumes being produced locally.
Choppy Sales
Although sales are expected to remain “choppy” during the transitions phase, management expect to correct issues by the end of Q2. However, Morris believes that the impact could continue into 2H2016.
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