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Amid the recent hubbub regarding the safety of its energy drinks, Monster Beverage (NASDAQ:MNST) reported mixed third quarter results Wednesday afternoon. The firm generated $542 million in revenue, 14% higher than the same period a year ago and slightly below consensus expectations. Earnings growth was disappointing, increasing just 7% year-over-year to $0.47 per share, considerably trailing consensus estimates.

Gross margins at Monster Beverage tumbled during the quarter, falling 220 basis points year-over-year to 50.5%. The firm blamed heavy promotional spending, as well as increased shipping costs due to higher international sales. With aggregate international sales increasing 24%, and according to management, a very fickle Japanese customer that rejected several hundred cases, we find this excuse believable. Sales to Europe, Middle East, and Africa jumped 43% (65% ex-currency), and we think the firm has plenty of room to grow in this geography. Needless to say, Red Bull dominates most European markets, but Monster offers a different value proposition-akin to McDonald's (NYSE:MCD) coffee versus Starbucks (NASDAQ:SBUX) coffee.

The big issue with the company on the domestic front remains healthfulness. As we've mentioned earlier, Monster faces scrutiny from the increase in caffeine-related emergency room visits over the past several years, as well as reports of people dying as a result of energy-drink consumption. The company vehemently denies these allegations, particularly those related to caffeine, as it correctly asserts that the typical Starbucks coffee contains double the concentration of caffeine. Based on our internal research, there aren't any specific ingredients or caffeine concentration for Monster's basic energy drinks that appear to have scientifically-grounded severe side effects. Studies show that caffeine toxicity and overdose requires such a tremendously large amount of the substance that it would be nearly impossible for anyone to achieve it via coffee or energy drinks. Still, the FDA continues to investigate the firm and regulation remains possible. The company continues to ride industry tailwinds. According management on the conference call:

…for the 13 weeks through October 20, 2012 for all outlets combined, then the convenience grocery, drug and mass merchandisers on the expanded basis I just described, including Wal-Mart, dollar stores, DeCA Military Stores and club stores, but excluding Costco. Sales in dollars in the energy drink category including shops increased 13.3% versus the same period a year ago.

More importantly, Monster's new beverages, like its Rehab Rehydration Energy Drinks, continue to help boost sales versus competitors. Again, from the conference call:

Sales of Monster grew 19.5% in the 13 week period while sales of Red Bull increased by 16.6%. Sales of Rockstar increased by 10.8% and sales of 5-Hour decreased by 1.8%. Sales of Amp were down 8.9%, NOS increased 13.2% off a low base and sales of Full Throttle increased 9.1%.

Though margins were a bit lower than desired, we thought the quarter wasn't terrible. Health concerns obviously can provide a powerful headwind in coming periods, especially if they start to erode consumer confidence in the safety of the products in the segment, but we think Monster Beverage will bounce back. Shares are fairly valued at current levels, but ongoing stock-price pressure from negative health sentiment could make the company cheap enough for us to get interested (click here to learn the criteria behind the stocks we like). Further, the chance of a buyout from Coca-Cola (NYSE:KO) remains possible, though less probable than before the health-concern allegations surfaced.

Source: Health Concerns, Sales Weakness Hit Monster