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Monster Beverage’s margins rise significantly in 2014

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Profitable energy drinks business

Monster Beverage (MNST) derives most of its revenues from the sale of energy drinks. Energy drinks are more profitable and have higher margins than soda drinks, primarily due to higher pricing. Plus, the energy drinks category continues to register strong growth compared to carbonated soft drinks, despite negative publicity about the ill effects of excessive consumption of these beverages.

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Gross margins

Monster Beverage’s gross margins rose to 54.4% in 2014, compared to 52.2% in 2013. Several factors drove the improvement in gross margins:

  • higher prices on the 24-ounce Monster Energy brand energy drinks and Peace Tea line
  • lower promotional and other allowances as a proportion of gross sales
  • favorable product sales mix
  • lower costs of certain raw materials
  • production efficiencies

The gross margin in 4Q14 also increased to 54.8%, compared to 51.3% in 4Q13.

Operating margins increase considerably

Monster Beverage’s 2014 operating margin increased to 30.3%, up from 25.5% in the prior year. Monster Beverage’s margins were up as a result of decreased expenses, including:

  • lower distribution expenses
  • lower premiums
  • decreased expenditures for allocated trade development
  • decreased expenditure for point-of-sale materials

Also, the company’s operations outside of North America generated $37.8 million of operating income in 2014, compared to an operating loss of $13.4 million in 2013. The operating margin in 4Q14 increased to 31.9%, up from 24.9% in 4Q13.

Comparison to peers’ margins

Coca-Cola’s (KO) operating margin declined to 21.1% in 2014, from 21.8% in 2013. PepsiCo (PEP) reported an operating margin of 14.4%, down from 14.6% in 2013. Both Coca-Cola and PepsiCo recorded several one-time items in the year.

Dr Pepper Snapple (DPS), the third largest US soda maker, reported higher margins of 19.3% in 2014, compared to 17.4% in the prior year, helped by productivity measures.

The Consumer Staples Select Sector SPDR Fund (XLP) and the First Trust Consumer Staples AlphaDEX Fund (FXG) have around 19.9% and 17% holdings, respectively, in beverage companies.

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