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Things that Could Influence Monster Beverage’s 2Q15 Margins

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Margins in the previous quarter

In this part of our series, we’ll assess the various factors that might play on Monster Beverage’s (MNST) margins in the second quarter of 2015, which ended June 30, 2015. The company’s gross margin in the first quarter increased to 58.9% from 53.5% in the corresponding quarter of the previous year. Monster Beverage’s operating margin was down significantly to 1.2% in 1Q15 from 27.8% on a year-over-year basis due to charges concerning the termination of third-party distribution agreements and higher payroll expenses.

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Favorable factors

Monster Beverage’s margins in 2Q15 might benefit from higher sales, given that the company’s product portfolio now includes Coca-Cola’s energy drink brands. Lower costs of certain raw materials and production efficiencies, which worked in the company’s favor in 1Q15, might also increase margins in the second quarter.

Monster Beverage is working on improving its margins by looking for local production in some of its international markets. This initiative is expected to bring down freight and damages as well as reduce exposure to currency fluctuations. Monster Beverage makes up 1.4% of portfolio holdings of the SPDR S&P 500 ETF (SPY) and 1.5% of the Consumer Staples Select Sector SPDR Fund (XLP).

Headwinds

Monster Beverage’s margins in 2Q15 are likely to be affected by costs related to the closure of its deal with Coca-Cola and distribution termination agreements. The strengthening of the dollar against the major currencies might also affect the company’s margins.

Competitors’ margins in 2Q15

Coca-Cola’s (KO) operating margin in 2Q15 fell to 20.9% from 25.2% on a year-over-year basis due to currency headwinds and structural changes. PepsiCo’s (PEP) operating margin increased by 107 basis points to 18.2%. The strong growth in PepsiCo’s operating margin was a result of higher pricing, cost reduction efforts, and revenue management strategies. Dr Pepper Snapple (DPS) reported an operating margin of 22.3% in 2Q15, up from 21.3% in the comparable quarter of 2014, driven by higher revenue and its productivity program.

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