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Monster Beverage: Can You Expect Improved Margins in 3Q15?

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High margin concentrate business

In the previous part of this series, we mentioned the new segment classification of Monster Beverage (MNST), comprising the Finished Products segment, the Concentrate segment, and the Other segment. The Concentrate segment basically includes the energy drinks brands acquired from Coca-Cola (KO). The Finished Products segment generates higher net operating revenue but delivers a lower gross profit margin compared to the Concentrate segment. Higher revenue from the company’s Concentrate segment will likely benefit the company’s future margins.

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Margins in the previous quarter

In 2Q15, Monster Beverage reported a gross margin of 56.9%, up from 55.2% in 2Q14. The improved gross margin was due to net sales of the Concentrate segment, which generates higher gross margins than the Finished Products segment. Also, the decline in sales of the lower-margin Other segment favorably affected 2Q15 gross margin. Changes in the product sales mix and lower costs of certain raw materials also benefited Monster Beverage’s margins in 2Q15.

Monster Beverage’s operating margin increased to 52.8% in 2Q15 from 31.4% in 2Q14 due to a one-time gain associated with the sale of the non-energy drinks business. Excluding one-time items, the company’s operating margin improved to 32.9% in 2Q15 from 31.6% in 2Q14.

Monster Beverage constitutes 1.1% of the PowerShares DWA Momentum Portfolio (PDP).

Peer group margins

Nonalcoholic beverage companies Coca-Cola, PepsiCo (PEP), and Cott Corporation (COT) have already declared their 3Q15 results. Coca-Cola’s operating margin in 3Q15 fell to 20.8% from 22.6% in the comparable quarter of the previous year. The decline in operating margin was due to lower gross margin and higher marketing investments. Coca-Cola’s gross margin declined due to structural changes and adverse currency fluctuations. PepsiCo’s 3Q15 operating margin declined to 8.7% from 16.5% in 3Q14 as a result of a $1.4 billion impairment charge related to the company’s Venezuelan operations.

Cott Corporation’s operating margin improved to 3.8% in 3Q15 from 3.3% in 3Q14 due to an improvement in gross margin as a result of volume stabilization within the Cott North America business unit. Dr Pepper Snapple’s (DPS) operating margin increased to 20.7% in 3Q15 from 20% in 3Q14, driven by productivity measures.

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