CORONA, Calif. -- The future for Monster Energy may look a lot like Mountain Dew or a sports drink.
Reporting from Monster Beverages' annual shareholder meeting in Corona, Calif., on Tuesday, beverage analyst Bonnie Herzog said she came away feeling confident about the company because "its runway for growth is vast, and the market is underestimating the future potential for Monster to reaccelerate growth."
In recent months, Monster Energy's sales growth generally has been limited to single-digit increases after months and years of double-digit growth. Herzog, however, believes the beverage maker can turn that around.
"We continue to see significant upside potential for Monster both through new innovation and international expansion," the Wells Fargo Securities analyst wrote. "Based on our revised expectations, we reiterate our outperform rating." Herzog also increased her earning-per-share estimates for the company's 2016-2017 fiscal year.
She said her optimism is based on four key takeaways from the shareholder meeting:
- Monster announced two major new platform innovations: Mutant, a "super-soda" targeted at Mountain Dew, and Hydro, a noncarbonated energy-enhanced hydration drink.
- Trials to sell Monster Energy in McDonald's and Dunkin' Donuts restaurants with positive initial results.
- International expansion progressing with plans to launch in Denmark, South Africa, Colombia and other Central and South American countries in the third quarter and targeting China in the latter part of 2016.
- Production to commence in India later this year as part of Monster's ongoing efforts to expand local production to drive higher gross margins and reduce inventory losses.
Herzog offered some additional thoughts on the new product platforms.
"We believe Monster will roll out Mutant and Hydro in a major way, leveraging the entire Coca-Cola distribution on a scale significantly larger than its previous launches of Ultra and Rehab," she said. "This opportunity should not be underestimated in our view.
Vivien Azer, an analyst with Cowen and Co., said Monster executives described Mutant as a "super soda" that will be positioned as a carbonated soft drink with two SKUs. The product "will be focused on the convenience channel at a price point of about $1.99 per 20-ounce bottle," Azer wrote in a research note.
Hydro "will be positioned as an alternative category for an active consumer (not a water, not a sports drink)," Azer said. The drink, expected to launch in the fourth quarter of this year, will be sold in a 16.9-ounce "plastic can with an aluminum top" with a price point of between $2.69 and $2.89.
"Importantly," Herzog said, "we note that neither Mutant nor Hydro will directly compete with any of Coca-Cola's products, which should dispel concerns about distribution within the Coca-Cola system, and [we] believe the biggest losers of shelf/cooler space will be PepsiCo and underperforming waters."
She added that the two new beverage platforms should gain "mostly incremental cooler space" outside energy shelves and will expand the brand's reach into new households and consumers, particularly with women.
"In fact," she said, "we think Hydro could perform very well with the female demographic, in which Monster is underindexed. Ultimately we expect these new products could vastly accelerate growth for Monster Beverages."