3 Reasons Why Jefferies Downgrades Monster (MNST) to Hold

October 13, 2021 9:46 AM EDT
Get Alerts MNST Hot Sheet
Price: $85.25 +0.38%

Rating Summary:
    16 Buy, 10 Hold, 1 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 5 | Down: 12 | New: 29
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Shares of Monster Beverage (NASDAQ: MNST) are down over 2% in today’s trading session after Jefferies analyst Kevin Grundy downgraded to Hold from Buy.

The analyst outlined 3 key reasons behind his today’s call: 1) Worrisome US market share losses, 2) Supply chain issues will likely extend into '22, 3) Intl. story in "middle-innings" seven yrs. into KO agreement.

As a result, Grundy has slashed '22-23 EPS estimates by 8-9% and sees for premium multiple of 23x EV/EBITDA.

“The emergence of the "performance" sub-segment (e.g., Bang, Celsius, C-4, Zoa) w/ in the energy drink category has broadened the industry's appeal to consumers seeking healthier / more authentic brands. This dynamic has presented clear risk to incumbent brands (i.e., Monster, Red Bull) w/ recent disruption in a number of CPG categories (e.g., men's grooming, sports drinks) offering dire potential foreshadowing of what may be in-store for MNST. After peaking in Nielsen channels at ~44% in Apr. '18, MNST's US mkt share is now ~37%. We f-cast ~3% US growth for MNST in '22/23 (vs. 7.5%/6% prior) given our expectation of ~100-150 bps p.a. of mkt share losses,” the analyst said in a client note.

On supply chain issues, Grundy is also worried about the lack of pricing, which may point to the downside to Street consensus.

“Supply chain pressure points (e.g., tight transportation, labor, raw material mkts) appear more likely than not to extend into '22. Moreover, while respective mkt share leaders have generally announced price increases across most CPG categories, neither MNST nor Red Bull have done so to date (emblematic of historically less rational pricing in energy drink category). As a result, we cut our EBITDA margin outlook to 33.1%/34.6% (vs. 35.2%/35.9% prior, Street 35.8%/35.5%).”

Grundy said that shares could fade “into low $80s” going forward. A new price target is $92.00 per share, down from the prior $113.00 per share.

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