Goldman Defends Monster Beverage, Bullish On Future Of Sequential Gross Margins

Shares of Monster Beverage Corporation MNST fell as low as $152.75 Monday, closing the day down 3.76 percent at $155.54.

Wells Fargo's Bonnie Herzog downgraded its rating on the stock, citing concerns around softer sales and the potential for an EPS miss in the second quarter. Later in the day, analysts at Goldman Sachs issued a report reiterating a Buy rating on shares.

In a research note, Goldman argued the “weakness should provide a buying opportunity,” maintaining its second quarter EPS estimate of $1.02, versus consensus at $1.03. Nielsen data through July 2 suggests rolling 12-week sales growth of roughly 5 percent. While this figure has remained mostly steady since mid-May, it implies a deceleration from the high single-digits seen in the first quarter of the year.

Moreover, while there is a softer trend impacting the broader beverage industry, apparently driven by unfavorable weather, Monster Beverage has managed to outperform the energy drink category, which has posted a growth of 3.5 percent for the 12 weeks ended July 2.

The report pointed out that Goldman expects the actual sales growth rate to more than double Nielsen’s reported trend, and that gross margins should be further helped by the lower costs from acquisition of AFF. In fact, the analysts expect another surge in gross margin in the second quarter, to 64.1 percent, from 62.2 percent in the first quarter “as the acquisition of AFF should lower COGS by around $19mn (or 270bps margin benefit), all else being equal.”

Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned above.