Monster Beverage Corp. MNST is bracing for tighter margins in the second quarter as rising aluminum costs and tariff-related premiums begin to squeeze its bottom line.
What Happened: During the company’s first quarter earnings call on Thursday, Vice Chairman and Co-CEO, Hilton Schlosberg, said that Monster’s layered hedging strategy may not be able to contain certain costs, particularly the rise in aluminum prices stemming from the tariffs.
“We use a ladder approach for hedging, and it's very difficult and somewhat expensive to hedge the Midwest premium,” he said, referring to the regional surcharge applied to aluminum deliveries in the U.S. Midwest.
“To a limited degree, we are hedged with certain volumes in the Midwest premium,” Schlosberg said, while acknowledging, “we don't always win” with hedging. He added that the purpose of the company's hedging strategy is to manage risk and avoid leaving the business overly exposed to price volatility.
Looking ahead, Schlosberg warned that rising material costs, including the Midwest aluminum premium, are likely to pressure margins in the coming months. “I wouldn't expect that the second quarter margin will be as high as the first quarter margin,” he said.
Why It Matters: In February, Coca-Cola Co. KO warned that the tariffs on Aluminum could force it to use more plastic to keep prices stable. “If aluminum cans become more expensive, we can put more emphasis on PET bottles,” the company’s CEO, James Quincey, said.
Even Alcoa Corp. AA, the largest aluminum producer in the U.S., recently disclosed that tariffs have taken a toll on its bottom line, while estimating an annual earnings impact of $425 million. The company noted that 70% of its production based in Canada is destined for American consumers, making it vulnerable.
Monster Beverages is also expected to face certain headwinds stemming from cuts in the U.S. Federal Government’s Supplemental Nutrition Assistance Program (SNAP), with roughly 10% of its $123 billion annual budget being spent on soda.
During its first quarter results, Monster reported $1.85 billion in revenue, down 2.3% year-over-year, with a profit of $0.45 per share, up 7.4% from last year. The company missed consensus estimates at the top and bottom lines.
Price Action: The stock was down 0.69% on Thursday, and is down 0.73% after hours, following its first quarter, which fell short of analyst estimates.
According to Benzinga’s Edge Stock Rankings, the stock sports a favorable price trend in the short, medium, and long term. For more insights, sign up for Benzinga Edge.
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