Monster Beverage (MNST - Get Report) gained more than 6% Tuesday after a SunTrust analyst upgraded shares of the energy drink company to "buy" while dismissing as "overblown" concerns about Coca-Cola's (KO - Get Report) plans to launch a rival beverage and the potential for slowing growth in its key China market.
SunTrust Robinson Humphrey analyst William Chappell upgraded Monster's stock from "hold" to "buy" while raising the price target to $65 from $50.
The SunTrust analyst cited Monster's efforts to reduce costs and raise prices, as well as its belief that the Coke competition and China growth issues had been blown out of proportion.
Monster stock rose $3.20, or 6.4%, to close at $52.93.
"Last summer we felt the Street expectations for gross margins were too high. After recent declines in input costs and successful U.S. pricing actions, we now believe they are too low," Chappell wrote.
Coke will likely hit the market this year with its Coke Energy drink after clearing some legal hurdles, but it is not likely to have a major effect on Monster given "$9B U.S energy drink category has already fragmented into multiple segments," Chappell said.
"From shots to caffeine enhanced teas/juices to energy sodas, there are a wide variety of products targeting a wide variety of constituencies," Chappell said in his report.
As far as concerns go over a slowing Chinese economy, Monster is well-positioned to capitalize on what remains an energy-drink-thirsty Chinese market with double-digit growth in 2019.
"We believe MNST is positioned as an aspirational western brand in China," the SunTrust analyst said.
Monster is also benefiting from the combination of a successful price increase coupled with a drop in the costs of producing its energy drink, including the price of crude oil, aluminum and sugar.
Monster's decision to boost prices in the U.S. by 4% appears to have paid off, with the Nov. 1 price increase having not impact on sales volume, according to Chappell. "This leads us to believe that pricing will stick throughout 2019," he said.
SunTrust also raised its 2019 EPS projections to $2.05 from $1.92.
The combination of the price increase with lower material costs will provide as substantial boost to Monster Beverage's profitability of "110bps to annual gross margin assuming all else is equal," Chappell said.