Narrow-moat Monster Beverage MNST posted accelerating volume and better-than-expected profit growth in the third quarter, reinforcing our confidence in its long-term prospects underpinned by brand intangibles and the strategic partnership with wide-moat Coca-Cola. Sales grew 14% (on an 11% volume expansion, accelerating from 8% in the first half) and EPS rose 43%, outpacing our estimates for 13% and 25% increases, respectively. We plan to tick up our 2023 forecasts, but our 10-year projections for high-single-digit annual sales growth and operating margin averaging 32% remain in place. As such, our $48 fair value estimate will likely rise by a low-single-digit percentage. We view the shares as fairly valued.

Net sales for the Monster Energy drinks segment (90% of sales) grew 15% on a constant-currency basis, with low-teens volume expansion showcasing the firm’s ability to retain and expand its consumer base through product innovation (zero-sugar recipes, new fruit flavors, and slim packaging), effective digital marketing that resonates with consumers, and expanding distribution in Europe and Asia, including China, where Monster currently holds a low-single-digit volume share. We see volume upside from the Bang acquisition, which closed in July and should expand Monster’s exposure to the lifestyle segment of the energy drink market as well as help fend off competition from new entrants including Celsius and C4. However, we expect the volume contribution to be small in the coming quarters as distribution migrates to the Coke system. We think management is prudent to limit price hikes to 2%-3%, consistent with historical levels, which should help preserve its value proposition amid consumer belt-tightening. Operating margin expanded 180 basis points to 27.5%, thanks to easing freight and aluminum cost inflation and efficiency initiatives, and we think the firm remains on track to bring margins back to the low 30s over the next three years.