Is The Monster Being Tamed?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a recent CNBC article by Herb Greenberg, he brought up several challenges facing Monster Beverage (NASDAQ: MNST). In this piece he brought up two concerns facing the company. The first issue, is the question of future growth in the energy drink category. As Herb mentioned in his article, John Sicher of Beverage Digest said that his research shows that household penetration (of energy drinks) has fallen flat. The second issue is that of health concerns regarding the amount of caffeine in energy drinks, and their effect in particular on younger people. With Monster selling for nearly 30 times projected earnings, either one of these issues causing a slowdown in earnings would be a major risk to the stock. Let's examine each issue individually, and see if investors should be concerned that this Monster is being tamed.
If Growth Is Slowing No One Told Monster:
Where the issue of slowing growth is concerned, the numbers that both Monster and their competition have posted just don't seem to bear out the idea that this category is slowing down. In fact, I've written in the past that a larger beverage manufacturer such as Coca-Cola (NYSE: KO) should consider acquiring Monster to increase their future growth prospects. Just for point of reference, in their two most recent earnings reports, Coca-Cola showed energy drink volume up 25% and 21% respectively. PepsiCo (NYSE: PEP) seems the clear laggard in this space as the company showed overall single-digit volume increases in their last quarter. While PepsiCo does not break out their individual beverage concepts, the company ranks far behind Monster, Coca-Cola, and Red Bull in the energy drink market. In addition, in Monster's most recent quarter they showed volume growth of 29.94%. While it's certainly true that over time each drink category begins to mature, it's highly unlikely that Monster will see 30% growth suddenly disappear indicating that the market has become saturated. Health concerns about energy drinks from what I've seen, appear no different than the concerns of overconsumption of any food or drink product.
Health Concerns Might Lead To Smaller Packaging:
In a scary statement in Mr. Greenberg's article, he referenced that a Maryland teen died after drinking two 24 ounce cans of a Monster drink. He also mentioned that Sen. Dick Durbin asked the FDA to regulate caffeine in energy drinks. However, “the FDA fired back, saying that energy drinks don't have more caffeine than coffee and other drinks.” To get to the bottom of this, I've done some research of my own about not only the Maryland incident, but also some of the nutritional information and studies regarding energy drinks.
What happened in the situation with the Maryland teenager was she drank 2 servings of 24 ounce Monster drinks while hanging out with some friends. There seem to have been two contributing factors that put her in particular at risk. First, she had a heart condition called mitral valve prolapse which causes one of the heart valves to malfunction. The second issue is her consumption of two 24 ounce servings is the equivalent of 6 servings according to product labeling. This high level of caffeine intake, combined with her age of 14, and her known heart condition, seem to be all contributing factors to what happened. Her cause of death was listed as caffeine toxicity and to date; Monster vehemently denies that her cause of death could have occurred solely from drinking two 24 ounce servings of their beverage. From this sad occurrence, investors, parents, and adolescents can learn several lessons.
According to the American Academy Of Pediatrics in a study of energy drinks, there were several warnings and suggestions given. First, the academy said that in the United States, adolescent caffeine intake averages 60 mg to 70 mg per day, but ranges up to 800 mg per day. In this paper, the suggestion was that adolescent and child caffeine consumption should not exceed 100 mg per day. In addition, the research paper said, “children with cardiac conditions should be counseled regarding the risks of caffeine containing products.” One takeaway is, on average adolescents consume a little less than the average caffeine in one serving of popular energy drinks per day. However, with a range of as much as 800 mg of caffeine per day, this means some adolescents are taking in the equivalent of 10 servings in a single day. Monster contains roughly 80 mg of caffeine per 8 ounces. This seems consistent with the industry, as Red Bull reveals about 80 mg of caffeine in a one can serving of 8.4 ounces. By point of comparison, Red Bull also provides similar caffeine content comparisons to other foods and drinks. For example, in an 8 ounce serving of dripped coffee there can exist as much as 100 or more milligrams of caffeine. In a plain bar of dark chocolate as much as 73 mg of caffeine can be found. Regular sodas normally contain around 40 to 50 mg of caffeine. The point is, energy drinks are not the only product that contains higher amounts of caffeine. It seems likely that Monster may be wise to change their serving size to 8 oz. as opposed to offering 24 oz selections. The amount of caffeine in one 24 ounce serving of Monster would be similar to: eating 3 bars of dark chocolate, drinking 2.5 cups of 8 ounces of coffee, or drinking more than 5 cans of traditional soda. This change in product size would in theory eliminate the issue that some consumers might not realize the amount of caffeine they are consuming.
In the end, while it's possible that Monster may need to change their package size to match more closely their serving size, it doesn't necessarily appear that their product is a health concern. At the very least, a normal serving of a Monster beverage couldn't be considered any more dangerous than eating a plain bar of dark chocolate, or drinking 8 ounces of coffee. When it comes to growth, Monster is the clear leader among public companies selling energy drinks. In addition, the stock is not as expensive as it first appears. Monster sells for roughly two times its expected growth rate, whereas Coca-Cola and PepsiCo sell for 2.6 times and nearly 4 times their respective growth rates. As you can see, even if Monster sees much slower growth as analysts expect in the future, the stock is actually trading at a discount to its two larger competitors. In the short term, slowing growth does not appear to be a problem. While health concerns might cause smaller package sizing, this risk is manageable and should not derail this company's growth.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend Monster Beverage, PepsiCo, and The Coca-Cola Company. 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.