Is Trouble Brewing for Monster Beverage?

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

Everyone has different ways to get rid of their yawns and get through the rest of the day--some prefer energy drinks, some prefer coffee, others prefer energy shots. Everyone is different when it comes to what they think is safe yet still effective. It seems like only a few years ago that people would serve their fatigue with a caffeinated Diet Coke. In fact, Coca Cola (NYSE: KO) was a huge player in the industry of getting people from 2:30 to 5:00 at work. But, a new titan soon emerged.

Monster Beverage (NASDAQ: MNST) is one of the industry leaders in the energy drink market; their trademark "M" logo can be seen everywhere (especially in places involved with their target crowd--athletes at the X-Games, etc.) They are one of the best advertisers in the business, with Red Bull being the main competitor. 

By the numbers, Monster isn't bad at all. In fact, their return on equity of almost 23 is impressive. Usually, I like to compare companies using their ROE as one determining factor of whether or not to invest. However, nearly all of Monster's competitors are privately owned with unknown ROE numbers. PepsiCo (NYSE: PEP), makers of AMP Energy, are obviously a publicly traded company, but using their ROE would not reflect the ROE of AMP even remotely. So, there isn't much here.

The main reason for their incredible success, however, is the demand to stay awake--especially among their target audience of teenagers. They market abundantly in this field, and do so successfully. As a result, people turned from soda to energy drinks to keep them awake. Just take a look at their performance over the past two years: (Source: Yahoo)

 

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However, Monster recently saw it's success come to a halt. Over the last few months, as clearly visible in the graph, the upwards trend has turned, well, downwards. There are a few reasons for this:

1.) Some of the ingredients in energy drinks have been spoken out against. Many people are learning now that they really aren't good for you. In fact, they're learning that they are worse for you than you may think.

2.) Competitor 5-hour Energy has hit the ground running with incredible success. The energy shot offers several advantages over energy drinks, such as convenience, price, and speculated decreased health risks. 

3.) The reason that MNST took a sudden drop right at the end of the graph (I know it's hard to see) is because of a recent investigation launched by a state attorney general. There is very little known about this as of right now, but the disclosure in Monster Beverage's 10-Q filed with the SEC includes:

In July 2012, the Company received a subpoena from a state attorney general in connection with an investigation concerning the Company's advertising, marketing, promotion, ingredients, usage, and sale of its Monster Energy brand of energy drinks. As the investigation is in an early stage, it is unknown what, if any, action the state attorney general may take against the Company, the relief which may be sought in the event of any such proceeding, or whether such proceeding could have a material adverse effect on the Company's business, financial condition, or results of operations.

Obviously, this is all incredibly vague and doesn't specify any information about the state attorney generals. So, as of right now, I wouldn't find this overly concerning. However, it was significant enough to send shares down over 11% in one day.

Still, if I owned shares of Monster, I wouldn't see this as a significant threat. What I would see as a threat is the fast takeover by 5-Hour Energy, which offers benefits that Monster just can't. Even Red Bull, one of the biggest players in the energy drink market, tried to develop an energy shot product, but took it off the market quickly after it failed to 5-Hour Energy. The truth is, the company behind the famous tiny red bottles owns over 90% of the energy shot market share, and energy shots seem to be taking the energy market by storm. So, watch out, Monster Beverage.

Foolish bottom line

Do I see the investigation as a threat? No. Could it be? Absolutely. However, until more information surfaces, it is too vague to buy or sell solely on the information available now. There is enough information, though, on the competitors of Monster Beverage. I'll let you make your own decision as to whether or not the competition is fierce enough to take them down, or whether Monster will come out on top.

Even if you are pro-Monster, no portfolio can be based on just one stock. That's why you should check out my latest article detailing the emergence of a new industry and the few stocks to play it, A Basic Introduction into a Field That's Anything but Basic.

 


Michael Nolan owns shares of PepsiCo. 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.

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