Earnings Eclipsed by PR Nightmare

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

Monster Beverage Corp (NASDAQ: MNST) is reporting earnings on Nov. 7. Monster's share price has already taken quite a beating after serious concerns over its alleged contribution to the death of a teenager last December and the subsequent Congressional table pounding, as well as the New York attorney general's call to regulate and investigate the energy beverage sector.

Monster's stock had been on a rampage, with the company last reporting earnings of $0.59 a share compared to $0.45 a share in the same quarter a year ago. With legal challenges mounting after publicity over the teen's family bringing suit to the company, the stock plunged to a low of $40.06 the day AP reported the FDA is investigating four other deaths and one heart attack alleged to Monster Energy Drink consumptionThe company, of course, disputes all these charges.

These are in addition to the original incident, in which the fourteen-year-old girl consumed the equivalent amount of caffeine of 14 cans of soda (168 ounces) by drinking 2 cans of Monster (totaling 48 ounces of a Monster beverage) in 24 hours. Monster is not the only publicly traded company that manufactures energy drinks: Pepsico (NYSE: PEP), Coca-Cola (NYSE: KO), and Starbucks (NASDAQ: SBUX) have their own versions of energy drinks, albeit they each have a fraction of the market share compared to Monster's 35% and Red Bull's (privately held) 30%.

It's somewhat ironic that Monster is having these troubles because it was originally founded in 1935 as a small organic juice company called Hansen's Natural, and its products could only be found in health foods stores. The company still offers health and wellness drinks, juices, smoothies, probiotic drinks, vitamin waters, and natural sodas. These haven't been the big moneymakers, however.

With their energy drinks under attack the stock has been halved since its 52-week high of $83.96 on April 30. The short float was at 2.30% as of Oct. 15, which is surprising as there were already mutterings about regulating the energy drink space. The short interest is probably much higher now. It still has $287.51 million in free cash flow and no debt. The P/E has come down to 24.60, with a forward P/E of 18.12.

Until this point, Monster's fundamentals, in terms of profit margins (17.23%) and return on equity (31.13%) were competitive with the big soda names, as consumers trend away from sugary fizzy drinks to performance and health drinks, known in the biz as functional drinks. The energy drink sector grew 16% last year and the advertising and promotion of these products is skewed to young people. Canada is already regulating these drinks by limiting the amount in a single serving and other countries are considering regulation.

Pepsi will not be affected as much as Monster as it has its beverage brands, Pepsi-Cola, Gatorade, and Tropicana brands and all its food and snack products under the Frito-Lay and Quaker brands to ease any regulatory pressure. Pepsi's profit margin is only 9.03%, and its return on equity is 26.10%.

As for Coca-Cola, the maker of sparkling and still beverages also makes energy drinks. On their energy drink site, they show their four energy drinks, as well as an educational overview of energy drinks in general. Both Coca-Cola and Pepsi each own 5% or less of the energy drink sector, so their stocks should not be impacted too severely; but Coca-Cola doesn't have the buttress of all the food products that Pepsi has. Coca-Cola's profit margin is 18.48% and its return on equity is 26.42%.

More than likely the actual consumers of Monster's energy drinks haven't been deterred by the headlines, and earnings will probably continue their growth momentum. In this case, the numbers will have to be "spectacular" to offset this storm of negative news, with not just one but two New York Times stories out on Nov. 4 about the issues with energy drinks.

The big New York Times story was that the New York State attorney general has actually subpoenaed both Monster and Pepsi. If you are already a Monster shareholder and the stock rises after earnings, that would likely be a good opportunity to sell. If you were thinking of buying before earnings, to get a jolt of a short squeeze, you may be in for a very unpleasant comedown. This controversy isn't going away and I can see that it might get to the point where Pepsi and Coke might wind down energy drink production or discontinue it entirely. Monster would be shattered if not shuttered if this storm escalates into FDA regulation and losses in court.

Whatever the company reports on the call, the numbers will not be what analysts care about; all their questions will be about this PR nightmare. If not handled expertly, downgrades and market cap destruction are sure to follow. Sorry to be so grim, I usually like to be a little light-hearted but seriously, stay away from this Monster.

leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend The Coca-Cola Company, Monster Beverage, PepsiCo, and Starbucks. 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.

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