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JP Morgan downgrades Monster Beverage on rising gas prices, higher aluminum costs

  • J.P. Morgan lowers its rating to neutral from overweight for Monster Beverage shares, predicting lower profitability this year.
  • "On margins, we expect the issues that have plagued performance over the past three quarters to continue, particularly higher aluminum costs," the firm says.

Monster Energy drinks
David Paul Morris | Bloomberg | Getty Images
Monster Energy drinks

Monster Beverage's difficult year will get worse, according to J.P. Morgan.

The firm lowered its rating to neutral from overweight for Monster Beverage shares, predicting lower profitability this year.

On Tuesday, the company reported first-quarter earnings results that generally matched Wall Street expectations, but Monster's management cautioned investors about future profit-margin pressure from higher costs.

"We are concerned that higher gas prices may dampen [convenience store] trends (where the energy drink category and Monster over-index and have been growing faster in recent months after a tough 2017) in the coming months and slow US growth," analyst Andrea Teixeira wrote in a note to clients Wednesday. "On margins, we expect the issues that have plagued performance over the past three quarters to continue, particularly higher aluminum costs."

The company's stock closed down 7.5 percent Wednesday.

Teixeira reduced her price target for Monster Beverage shares to $52 from $67, representing 2 percent downside to Tuesday's close.

The analyst said the company's management cited higher costs from aluminum, freight and fuel prices for its uncertainty on future profit margins. As a result, Teixeira lowered her 2018 earnings per share estimate for Monster Beverage to $1.66 from $1.77.

"We expect margin pressure to continue behind higher input costs and continued geographic/product mix headwinds," she wrote. "We think the next 6-9 months will prove to be quite challenging for the stock."

Monster Beverage shares were down 16 percent this year through Tuesday versus the S&P 500's flat return.

— CNBC's Michael Bloom contributed to this story.