SunTrust Turns Bullish On Monster Beverage

After staying on the sidelines since at least early 2016, SunTrust now sees multiple reasons to turn bullish on Monster Beverage Corp MNST

The Analyst

SunTrust Robinson Humphrey's William Chappell, Jr. upgraded Monster Beverage from Hold to Buy with a price target lifted from $50 to $65.

The Thesis

Now is an opportune time to bullish on Monster Beverage despite six consecutive quarters of gross margin declines, Chappell said in the note. While investors are focused on poor margin performance for more than a year, the narrative may have "flipped" over the past three months after a sharp decrease in input costs like oil, aluminum and sugar. In fact, the company doesn't hedge these input costs and the full benefit of savings could be seen in the bottom half of 2019.

After a 4-percent price increase was implemented in November, recent scanner data is encouraging. Not only was the price increase passed through at retail, but it had no impact on sales volumes. Factoring in the price increase and decrease in input costs (assuming all else remains equal), Chappell said the company could see an extra 110 basis points in annual gross margin at 61.7 to 62.2 percent.

Chappell said concerns relating to The Coca-Cola Co KO's own branded energy products are overblown as the $9 billion energy beverage market is very fragmented. A typical Monster Beverage and Red Bull consumer is "meaningfully different" from those that will buy Coca-Cola energy beverages.

Price Action

Shares of Monster Beverage were trading higher by 6 percent at $52.70 Tuesday afternoon.

Related Links:

Which Beverages Stocks Will Pop? UBS Weigh In On The Sector

Out Of Energy: JPMorgan Downgrades Monster Beverage To Neutral