Event: MNST is set to report their Q2 earnings after the close tonight. The options market is implying almost an 11% move following the report which is far greater than the 4 qtr avg move of about 6.5% and 1 qtr avg of about 5.9%.
Sentiment: MNST is not a widely covered stock with only 10 firms covering the energy drink maker, of which 7 rate a Buy, 2 a Hold and 1 a Sell, with an average 12 month price target of about $80. Short interests sits at less than 2% of the float which is surprising when you consider how some of the last years high growth, high valuation consumer discretionary ex-darlings like NFLX, GMCR, CMG, DECK, CSTR & now PCLN have fared when rapid growth decelerates.
Price Action: MNST is up a whopping 46% ytd, and up 95% from last Augusts 2011 lows. On April 30th the stock had massive move higher intra-day on unfounded rumors that KO was considering some sort of deal for them, the stock quickly retreated giving back all the gains after KO commented on the rumor saying they were not in talks. The stock now sits about 13% below the all time closing highs made in June as weak commentary from the likes of CMG, SBUX and MCD have weighed on the shares.
Technicals: The chart has clearly been in a massive uptrend since last summer, but since making the late July downdraft following CMG’s disappointment, there appears to be many investors with their fingers on the trigger. The 200 day moving average at about $60 should serve as near term support, barring any disastrous news, but since making the blow-off KO high in April and then the all time closing high June, the chart appears vulnerable making a series of lower highs and lower lows.[caption id="attachment_15357" align="aligncenter" width="589" caption="1 YR MNST chart from Bloomberg"][/caption]
Fundamentals/Valuation: This is not a cheap stock trading at 27x next years expected earnings, which are expected to decelerate from 34% this year to 24% next. In Q1 MNST got about 20% of their sales from overseas, and sales outside of North America are expected to account for much of the company’s long term growth as the market here matures and becomes more competitive We have gotten plenty of data-points about weakening trends for products like this from SBUX, CMG and MCD (as recently as today), all citing varying degrees of softness both here and abroad, and all (except CMG) feeling the affects of the strong dollar.
Insider Selling: I would also mention that the President/Chairman (here and here) and the CEO (here and here) have both made notable sales of stock in both May and June, all of which at higher levels. I am not certain whether these were sales of options that had just been exercised but regardless it appears that they both sold at least 25% of their holdings from the SEC filings as both sold about 450k shares and are left with about 1.1million shares each. I would assume if they were negotiating takeover bids well above current levels, senior management would not be selling large stakes.
Volatility: Implied vol is sky high going into earnings, with the average implied vol across all months the highest it’s been in recent history. The ATM straddle in August is around 8 dollars, which is close to 100 vol. September vol is in the mid 50’s and is likely to fall into the 30’s or 40’s following earnings, depending on the size of the stock’s move.
August options are much higher than out months with skew high to the downside.
MY VIEW: This is a fairly tough call heading into tonight’s print, while I could clearly see the stock up or down $8 (in line with the implied move), I think buying the move is not a high probability play with Aug Implied Vol where it is, and where it is likely to go tomorrow no matter what the news.
The stock is clearly priced for perfection and any acknowledgment of slowing growth and the stock is likely to be down much more than $8. But if the company is able to beat Q2 and raise guidance I could see the stock back up to mid 70s. SO I think you get the juice to the downside, but there is a slight bit of pessimism built into the shares at the moment given the results of some of its perceived peers recent results/commentary.
STAY TUNED, STILL EVALUATING SOME DIFFERENT WAYS TO PLAY.