Should You Add This Monster to Your Portfolio?
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you invested in Monster Beverage (NASDAQ: MNST) in the early 2000's, then you might be reading this while lying on a raft in your indoor pool, sipping champagne, on a weekday. If so, you might not care too much about how the stock performs over the next year. For the rest of us, let's see if Monster is still a good investment.
Two wrongful death suits have been filed against Monster, formerly known as Hansen Natural. In one case, a 14-year old girl died after consuming a Monster Energy drink. The coroner cited, “Cardiac arrhythmia due to caffeine toxicity.” However, Monster representative, Bob Arnot disagreed, and the girl was later diagnosed with an underlying heart condition.
The other incident involved a 19-year-old man from California. He also died after consuming a drink, but Monster points to the fact that this man consumed two to four Monster beverages per day for several years without incident. Therefore, there must have been another factor leading to his cause of death.
The irony here is that Monster is willing to abide by any future industry regulations. Those opposed to Monster are asking for a label that indicates the drink might be harmful to those with an underlying heart condition. And the city of San Francisco is suing Monster for marketing to children and teens.
These are both easy fixes. If Monster puts a label on its drinks, indicating that its products might be harmful to those with an underlying heart condition, is not going to hurt sales much. In regards to marketing to children, it might be debatable if Monster has ever done so, but it’s a pretty safe bet that it won’t use Barney to sell the drink in the future.
Though energy drinks might cause jitters, nervousness, and high blood sugar levels, they’re known to be safe in moderation. That being the case, all legal issues should be looked at as temporary events that can be overcome.
Monster vs. peers
Monster Energy is a big player in the energy drink market. Below are energy drink market share results for 2012:
- Red Bull: 42%
- Monster: 37%
- Rockstar: 11%
- Amp: 4%
- NOS: 4%
- Full Throttle: 2%
Energy drink sales continue to increase while soda sales continue to decline. PepsiCo (NYSE: PEP) and Coca-Cola (NYSE: KO) have attempted to get involved, but their performance in this area has been underwhelming. Neither company has put a ton of capital behind these products compared to their other operations. They have been more focused on healthy offerings.
Many argue that PepsiCo and Coca-Cola have spread themselves too thin with their energy drinks. PepsiCo's Amp comes in seven flavors, most retailers have trouble selling that many on their shelves. Coca-Cola is focusing more on NOS, and it’s possible that Full Throttle will be divested in the future.
It’s still yet undetermined how involved PepsiCo and Coca-Cola would like to become in the energy drink market. They both have enough capital to become major players if they really want to, but it’s neither companies primary focus at the moment. Plus, Coca-Cola has a distribution agreement with Monster and PepsiCo has a distribution agreement with Rockstar. There has already been speculation about Monster and Rockstar being takeover targets by Coca-Cola and PepsiCo, respectively.
Despite their underperformance in the energy drink market, PepsiCo and Coca-Cola are consistent winners thanks to their strong brands, product diversification, geographic diversification, and top-tier management teams. Both companies are likely to continue to reward shareholders over the long haul, but what about Monster?
Monster might be dealing with some troubles at the moment, but it’s almost always a good idea to invest in a good company when the stock is beaten up by legal issues. These are temporary events and they won’t have a long-term impact on price.
The energy drink industry continues to grow, and there's no sign of that trend changing. It should also be noted that Monster’s stock was resilient during 2008 and 2009. Consumers still bought their caffeine-fix drinks during the height of the Great Recession, and Monster still managed to deliver profits at that time.
So Monster should remain a quality long-term investment, and if the past is any indicator, should also provide downside protection. If the stock drops significantly, then Monster will become more attractive to potential acquirers. Perhaps its time you took a look at this monster for yourself.
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Monster Beverage and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!