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Caffeine stocks get help from ‘monster’ deals

31 May 2016 in Trading Ideas

Key Takeaways

  • Monster Beverage’s profit and revenue jumped, thanks to its new distribution deal with Coke.
  • Krispy Kreme was bought out by a private equity firm that has stockpiled coffee brands.
  • Motifs mentioned: Caffeine Fix
  • Stocks mentioned: Monster Beverage (NASDAQ:MNST), Coca-Cola (NYSE:KO), Krispy Kreme Donuts (NYSE: KKD ), Mondelez (NASDAQ:MDLZ)

There’s nothing like finding the right partner.

Shares of energy drink maker Monster Beverage (NASDAQ:MNST) have jumped in the past month after the company posted better-than-expected increases in both profit and revenue for its latest quarter, thanks largely to a new distribution deal with new partner and minority shareholder Coca-Cola (NYSE:KO).

Monster said its quarterly profit rose to nearly $169 million, while revenue increased 8.5 percent to $680.9 million. Two years ago, Coke paid $2.15 billion to acquire a 16.7 percent stake in Monster as part of an asset swap in which the bottling giant also became Monster’s preferred distributor. Monster transferred all of its U.S. and Canada distribution to bottlers aligned with Coke and is in the process of making the switch abroad as well.

Monster CEO Rodney Sacks said the company was seeing improved distribution levels from the Coke deal, according to a recent Wall Street Journal report, and he noted that Monster had reached agreements with a number of other international Coke bottlers.1 Monster’s energy drinks will start selling in Australia and New Zealand in May as a result of a new agreement with Coca-Cola Amatil.

As Sacks pointed out, Coke bottlers reach more outlets with more beverages, and investors are likely looking for growth to ramp up even more as the Australian and New Zealand deals kick into gear.2

Monster’s stock has been on an outright tear since the company’s earnings, surging more than 20 percent in the last month. The shares have a 20.4 percent weighting in the Caffeine Fix motif, which has gained 4 percent in the last month. In that same period, the S&P 500 has increased 1.6 percent.

Over the past 12 months, the motif has risen 11.1 percent; the S&P 500 is off 0.4 percent.

Krispy Kreme boosts Caffeine Fix motif
Aside from Monster’s earnings-based push, the Caffeine Fix motif received a spark this month from another of its components – one that, sadly, will be departing the motif eventually.

Earlier this month, Krispy Kreme Donuts (NYSE:KKD) agreed to be bought by European investment fund JAB Holdings in a deal worth $1.35 billion that immediately pushed Krispy Kreme shares nearly 25 percent higher.3 You might remember JAB as the company that removed another Caffeine Fix mainstay earlier this year: it led an investment group that bought out Keurig Green Mountain for nearly $14 billion.

And these deals come on the heels of JAB paying roughly $5 billion for control of Mondelez’s (NASDAQ:MDLZ) coffee business last summer. In addition, the firm owns Peet’s Coffee & Tea, Stumptown Coffee Roasters, Caribou Coffee, Einstein Noah Restaurant Group, Intelligentsia Coffee and Danish coffee-bar chain Baresso Coffee.

Krispy Kreme, of course, sells coffee, too, which has it battling in a highly competitive market with Starbucks and Dunkin Donuts (owned by Dunkin Brands). And more is coming: Tim Hortons, bought last year by another deep-pocketed foreign investor, 3G Capital Partners, is intent on expanding the U.S. presence of the Canadian doughnut and coffee chain.

Industry watchers have speculated that JAB could pair Krispy Kreme with one or more of its coffee brands, according to a Journal report.4 For example, the firm has been merging its Einstein Bros. Bagels and Caribou Coffee in some markets into co-branded stores simply called Coffee & Bagels.

Such a strategy could work nicely for Krispy Kreme, which was already trying to bolster its coffee business as a way to attract customers who might not want doughnuts, the Journal said. The company has launched new coffee drinks and what it calls “edible coffee treats,” such as cappuccino and caramel macchiato-flavored snacks.

Private equity has certainly shown its interest in caffeine purveyors of late. That might serve investors in caffeine stocks, which could benefit both from steady profit growth as well as the chance of another high-priced takeover.

 

1Austen Hufford, “Monster Beverage Shares Jump After Earnings Beat,” wsj.com, April 29, 2016.

2Jennifer Kaplan, “Monster Beverage Rises After Coca-Cola Deal Boosts Sales, Profit,” Bloomberg.com, April 29, 2016, http://www.bloomberg.com/news/articles/2016-04-29/monster-beverage-rises-after-coca-cola-deal-boosts-sales-profit?cmpid=yhoo.headline.

3,4Julie Jargon and Mike Esterl, “Krispy Kreme to Be Acquired by Keurig Owner JAB for $1.35 Billion,” wsj.com, May 9, 2016.

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