A Window of Opportunity or a Value Trap?

Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Monster Beverage Corporation (NASDAQ: MNST) has been a monster of a stock in the last era as the increasing popularity of energy drinks has made it rise from the stature of a penny stock. However with the recent allegations regarding the health implications of the product after a teenager’s related death, the stock is seeing more volatility than ever. As the stock has already dropped 40% from June, investors are asking whether it’s the correct time to buy on weakness. My answer is still no.

The Volatility Factor

Monster is not a traditional consumer stock anymore. It has been susceptible to increasing volatility. With investors keeping close tabs on this stock keeping an eye for a window of opportunity, a small factor can send shares upward or downward by a good 10%. As it looks like Monster will be surrounded by a host of bad news for a while with its trouble with the legal authorities, I feel that Monster could have a further downside. As CLSA analyst Caroline Levy said "Despite recent share price declines, we are not yet more constructive on Monster, we see no near term catalysts for multiple expansion and see continued risks." With the US Senators urging FDA to look into the health prospects and San Francisco attorney Dennis J. Herrera going after Monster in all his might, I believe that Monster will not have a lot of good news/catalysts for a while and hence I will advise investors to keep their hands away from it. Looking further on the attack on energy drinks, I believe that Pepsi (NYSE: PEP) and Coca-Cola (NYSE: KO) would not be affected much as they have minimal share (around 5%) in the energy drink market compared to Monster’s 35% and Red Bull’s 30%. Apart from that, I believe that Pepsi’s and Coke’s presence in other beverage brands will provide a cushion from this recent attack.

The PE Factor

While Monster has seen a huge pullback recently, the stock still looks expensive. The stock’s current multiple of 24.9x, represents a healthy premium to Coca-Cola’s 18.94x and Pepsi’s 18.34. Such a high PE is attributed to the kind of returns Wall Street is expecting from Monster, but Monster is already falling behind the game. In the current earnings report while 3Q sales have rose 14% they look small when compared to 1Q12 which saw a 28% increase in sales YoY. EPS of 44 cents was also significant as compared to Street estimates of 55 cents.

The International Expansion Drawback

Monster has been focusing for a long time now to increase its international presence. Since 2008, the company has started launching its product in international markets starting from Western Europe. Today, Monster has entered or has plans to enter almost every major global market - North America, Europe, South America and Asia Pacific. The drawback that Monster faces with international expansion is that when looking at the energy drink category across international markets, it is worth noting that the category is far less developed in most emerging markets as well as in several large developed markets compared to the US looking at the percentage of energy drink sales in all NARTD beverage sales in the U.S. Monster will no doubt have to invest more in its newer markets as it strives to develop the brand-awareness that it carries in the U.S.

The Bottom Line

While the stock has deteriorated in recent months, it is still prone to many attacks from the health ministry which could lead to huge losses looking at the volatility. Further, in the aftermath of the events a change in government regulation regarding energy drinks could lead to a shift in consumer preference, which could affect the stock adversely. With shares still trading at a premium to its competitors, I believe that there is still scope for downside and hence recommend avoiding this stock.

Drink Up, Investors

There is absolutely no question that Coca-Cola has been great to long-term shareholders, but the company faces some new threats to its continued market dominance. The Motley Fool has recently compiled a premium research report containing everything you need to know about Coca-Cola. If you own or are considering owning shares in the company, you’ll want to click here now and get started!


gauravguru has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company, 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus