Analyst Note| Zain Akbari, CFA |
Similar to the after-hours trading price reaction, our $86 per share valuation of narrow-moat Monster Beverage should slide by a mid-single-digit percentage in the wake of its disappointing second-quarter earnings announcement. The company came under greater profitability strain that we expected, and its first-half gross margin swoon (down more than 800 basis points to 49%) suggests our estimate of a nearly 4-point full-year shortfall is overly optimistic, despite our view that conditions should improve in the second half. However, the margin pressure stems from supply chain challenges and widespread inflationary pressures that we expect to abate over time, and so we still forecast mid- to high-single-digit percentage annual sales growth and mid-30s operating margins over the long term. We suggest prospective investors await a more attractive entry point.