Is Monster A Monstrosity?

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

Monster (NASDAQ: MNST) saw its stock pop 9% after announcing it would change the wording on its energy drinks. The move was due to pressure relief related to issues surrounding health concerns and energy drinks. So is this a sign that the regulatory concerns that have kept the stock under pressure be over exaggerated?

The stock has fallen from its mid-2012 high of nearly $80, to now trade around $50 per share. This comes after the company was hit with concerns over slowing growth, and shares took a huge hit in October 2012 when news broke of a potential lawsuit against the company for the death of a teenager. 

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There is still overhang on the stock, related to the FDA's investigation on whether energy drinks can be dangerous to teens and people with heart problems, but I feel the pressure has been done (read about why Monster is a takeover target). Monster recently announced plans that will involve using federal guidelines for its products, which involves listing “nutrition facts” instead of “supplement facts” on their projects. Although this does not mean the company is ‘home-free,’ it is a step in the right direction and should help protect the company against future lawsuits.

Monster’s energy drinks is the company's top segment and accounts for over 90% of revenues. The energy market is rather robust, where total U.S. sales of alternative beverages is estimated to be $32 billion, according to Beverage Marketing Corporation. As far as market share is concerned, in dollars, Red Bull is the leader, but in volume Monster is the leader. The market share shapes up as follows:

In dollars…

  • Red Bull 34%
  • Monster 29.5%
  • 5-Hour Energy 13%
  • Rockstar 10%
  • Coke brands 5%
  • Pepsi brands 4.5%

In volume…

  • Monster 38%
  • Red Bull 25%
  • Rockstar14.4%
  • Coke brands 6.7%
  • Pepsi brands 6.4%
  • 5-Hour 1.5%

Monster has a solid position near the top of the energy drink industry, but how does the competition stack up? Other major competitors in the beverage industry includes PepsiCo (NYSE: PEP), Coca-Cola (NYSE: KO), Starbucks (NASDAQ: SBUX) and Dr. Pepper (NYSE: DPS). While Red Bull and Rockstar are both private brands, major beverage companies Pepsi and Coke have a hand in the energy drink market. Pepsi has its AMP drink and Coke has Full Throttle.

Pepsi recently announced 4Q results that showed EPS of $1.09 that was in line with management’s target, but down 5% from the same quarter a year ago. As far as caveats for Pepsi investors, the company has seen slowing North American sales, this despite increased marketing focused in the area. Coca-Cola is the leader in the U.S., as far as market share for carbonated drinks, and posted 4Q results that included EPS of $0.45, up 15% from the same quarter last year. However, opportunities could be afoot for Pepsi, given Coca-Cola has been lowering its advertising spending. Ad spending as a percent of sales has been in decline since 2006.

Dr. Pepper is also in the energy drink market, although having only a small presence with its Venom drink. Dr. Pepper posted 4Q results that included EPS of $0.82, which was a decline of 2.4% year-over-year. Dr. Pepper’s problems lie in the fact that the company operates in the U.S., Canada and Mexico, with little to no international exposure, putting Dr. Pepper at a disadvantage to other beverage companies. Even with a sole focus on North America, Dr. Pepper still does not stack up to Pepsi and Coca-Cola, which together make up over 60% of the U.S. liquid beverages market in terms of volume.

Starbucks indirectly competes with energy drinks with its coffee and tea products. What’s more is that the coffee company recently introduced a green coffee extract drink called ‘refreshers’, which has been compared to energy drinks. The coffee giant reported EPS of $0.57, with earnings growing 14% year-over-year, in line with management expectations. Challenges for Starbucks include a European slowdown and consumer preferences internationally. I think coffee and energy drinks are different markets, and I am also skeptical on its refresher drink, which has received mixed reviews.

Reasons to love energy drinks. What makes the energy drink market relatively unique is its high margin-high priced business, where by volume energy drinks make up only 3.3% of the carbonated beverages industry, but in dollars it accounts for 11.8% of the market—according to Beverage Digest. The fact that Monster’s business is indeed higher margin makes it a compelling investment opportunity with high returns on capital above other major publicly traded companies: 

Return on Investment

  • Monster 33%
  • Pepsi 11%
  • Coca-Cola 13% 
  • Starbucks 25%
  • Dr. Pepper 11%

Return on Equity

  • Monster 33%
  • Pepsi 28%
  • Coca-Cola 27% 
  • Starbucks 27%
  • Dr. Pepper 27%

Putting Monster another step above major competitors is its 'healthy' balance sheet, carrying no debt and having $590 million in cash. Check out Monster's debt to equity ratio of...

Debt to Equity

  • Monster 0%
  • Pepsi 127%
  • Coca-Cola 99%
  • Starbucks 11%
  • Dr. Pepper 120%

From both a profitability and solvency standpoint, Monster appears to be in good shape. But digging a bit deeper, Monster also offers investors the best priced growth, as measured by its price to earnings to growth ratio:

Price to Earnings to Growth

  • Monster 1.5
  • Pepsi 4.8
  • Coca-Cola 2.3 
  • Starbucks 1.6
  • Dr. Pepper 2.1

Don't be fooled. Not only am I interested in the company, but so are a number of other investors. This includes the fact that a number of insiders are heavily invested in the company, with the top officers, CEO and CFO, owning almost 20% of the company. As well, there are a number of billionaire hedge funds invested in the stock (see all hedge funds owning Monster). These include Janus Capital (3.67MM shares), Renaissance Technologies (1.9MM shares) and Citadel Advisors (1.45MM shares), who collectively own over 4% of the company (check out Simons top picks).

Although Starbucks is a close second on a number of the metrics above, and while I believe the company is a strong buy (read more here), I believe Starbucks presence will remain in the coffee market and that Monster is the best play on the energy drinks market. There is still speculation that remains around Monster’s regulation issues, but the stock could well be a solid investment opportunity in a rapidly growing industry. 

mhargra has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, PepsiCo, and Starbucks. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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