What Will Drive Monster Beverage’s 2Q16 Earnings Growth?

Monster Beverage (MNST) impressed its investors with 26% growth in its 1Q16 EPS (earnings per share), excluding the impact of one-time items. The company delivered an adjusted EPS of $0.80 in 1Q16, exceeding the consensus analysts’ estimate of $0.74. Monster Beverage managed to deliver strong earnings growth in 1Q16 despite a significant rise in the diluted share count due to the shares issued to Coca-Cola (KO) as part of a strategic deal between the two companies. In June 2015, Coca-Cola purchased a 16.7% stake in Monster Beverage. Monster Beverage transferred its non-energy drink brands to Coca-Cola in exchange for the latter’s energy drinks portfolio, which included brands like NOS and Burn.

The significant growth in Monster Beverage’s adjusted EPS in 1Q16 was driven by higher sales and improved margins. Monster Beverage’s earnings in 1Q16 also benefitted from a lower tax rate. The effective tax rate was 35.8% in 1Q16 compared to 38% in 1Q15. The lower effective tax rate resulted from the domestic production deduction. The iShares Global Consumer Staples ETF (KXI) has 0.6% exposure to Monster Beverage.

Coca-Cola, PepsiCo (PEP) and Dr Pepper Snapple (DPS) reported growth of -6.3%, 7.2%, and 16%, respectively, in their adjusted EPS in 1Q16. PepsiCo’s adjusted EPS grew by 2.3% in 2Q16, driven by improved margins and the strong performance of the company’s North America business.

Analysts expect Monster Beverage’s adjusted EPS to increase by about 31% to $1.04 in 2Q16. Higher sales and improved margins are likely to drive Monster Beverage’s earnings in 2Q16. As we mentioned in Part 1 of this series, analysts expect Monster Beverage’s sales to rise 15.9% in 2Q16. For full-year 2016, Monster Beverage’s adjusted EPS are expected to rise 31.4% to $3.93.

We’ll discuss analysts’ recommendations and stock price movement of Monster Beverage in the next part of this series.