Hide From That "2:30 Feeling"
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A wild imagination is not required to get under the covers and hide from Monster Beverage (NASDAQ: MNST) due to recent events that seem to be recurring on a regular basis. The public is becoming increasingly on edge. In a time when people don't take full responsibility for their actions (gulping down these energy drinks) combined with protective parents speaking out, it's only a matter of time before a lawsuit is successful for a consumer. Energy drink companies have been able to talk their way to safety so far, but repeated dents in any company will eventually damage the stock, particularly for the long-term investor.
CEO Rodney Sacks likened early advertising campaigns of sodas such as Dr. Pepper to his company because it was sold as a "pick-me-up," providing energy to the consumer. Whether the caffeine or another ingredient is at fault, he failed to mention that five deaths have been linked to Monster Energy products. Ingredients in the drinks are certified GRAS (Generally Recognized As Safe) and defenders of the products compare energy drinks to coffee regarding caffeine content. While this may be true, people don't die from coffee consumption. Energy drinks are aimed at the younger generation and combine the caffeine with loads of sugar, unnecessary mega-doses of vitamins, and other ingredients in a mysterious "proprietary blend."
Nutritional and food science research is a slow, gradual field. Studying ingredients such as guarana and taurine takes time, but as is the case with pharmaceutical companies, bad news drives the market in the wrong direction. Recent statistics show that 20% of consumers have reduced or terminated their usage of Monster Energy drinks. The underlying danger of this number is that these consumers are likely lost for the long-term, and this is only the tip of the media and investigative iceberg. The "aggressive growth" title granted from Morningstar is going to have to fight back to have any chance of keeping this status.
If numbers are more convincing, consider the goose egg in the yield department. Monster has increased its net income over the last three years and holds the second rank in the energy drink industry, which is reported to have generated $5.3 billion dollars last year. Even believers in the future of the company and the industry have to wonder when some of that money is going to end up in the hands of investors. Unfortunately, a lawsuit could delay that possibility for years.
Because of Monster's success over the last decade (including being added to The Motley Fool's ten best stocks of the past decade), there are likely more bulls investing in Monster. Luckily for these readers, there are plenty of great options in the beverage industry, such as previously mentioned Dr. Pepper Snapple Group. (NYSE: DPS). The stock trades at 13.5 times forward earnings, pays out over 3%, and has posted increasing revenues for three straight years. Sounds boring, but the possibility for growth should be luring because of the company's lack of exposure to emerging markets. Dr. Pepper plays against the juggernauts and still controls nearly 17% of the American soft drink market. If the success of its larger peers on the world scale is an indicator of the future, expect DPS to be a buy-and-hold company.
From a more qualitative standpoint, soda companies are an overall safer bet. People are not going to stop consuming soft drinks and there will be few to no lawsuits against the companies. Nutritionally, they're not any better, but their products haven't caused any deaths, at least not from direct consumption. Although soda is far from healthy, brands such as Dr. Pepper Snapple are ones that investors will identify with as far as the eye can see. Minimize your risk and maximize your potential with this company.
The debate rages on and many believe that energy drinks could go the way of cigarettes and alcohol, both of which have age restrictions. If this occurs, Monster could survive, but it would have to undergo a long-term transformation to become as profitable as other "sin stocks." The FDA is going to get involved in some form or another that won't be pretty for shareholders. Politics aside, the stock has too much potential to have a crash to be a safe investment. Growth will be stunted unless miracle research proves the safety of energy drinks. Tell your kids that this scary one going to stay under the bed for a while.
KyleVaughan has no positions in the stocks mentioned above. The Motley Fool owns shares of Monster Beverage. Motley Fool newsletter services recommend Monster Beverage. 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!