Sometimes sentiment can absolutely crush a stock's performance. In the case of Monster Beverage Corp. (MNST), this has been the case over the last couple of quarters as sales continue to slow and the company misses earnings expectations. In Q3 of 2012 analysts had expected the company to earn $.55 a share; however, the company reported only $.47 a share in earnings and missed by a wide margin. Investors would serve themselves well by understanding the bullet points below, which are stated reasons by management for the earnings miss and weaker than expected sales during the quarter.
- Less robust growth for the energy category as a whole in the U.S.
- Less robust growth for Monster Energy in the U.S. market, particularly in the latter half of the quarter.
- Lower sales in Canada in the quarter largely due to realignment by Coca Cola Canada of their inventory levels.
- The strength of the U.S. dollar against certain currencies in international markets.
- Lower sales of Monster Energy Extra Strength Nitrous Technology Energy drinks.
- Net sales for the company's warehouse segment decreased 7% to $25.7 million for the three months ended September 30, 2012.
- We have experienced a substantial drop-off in sales of Worx Energy shots.
- Gross profit margins achieved in the third quarter of 2012 were 50.5% versus 52.7% in the comparable quarter in 2011.
Monster is facing a great deal of headwinds when it comes to sentiment currently. Many claims are being launched at the company's products along with greater litigation. For investors and would-be investors in MNST, our previous article details the latest class action lawsuit filed by Iron Workers Pension Plan which is noted in Monster Beverage's latest 10-Q filing.
The "sentiment" story only gets worse for Monster Beverage Corp. as most recently the company was brought under sharp critique, along with other beverage coporations, in Chicago by way of a city alderman. The City of Chicago's most powerful alderman Thursday proposed a blanket ban on energy drinks like Red Bull, Monster, Full Throttle, 5-hour Energy and others. Within the proposal Alderman Ed Burk says, "No person shall sell, give away, barter, exchange or otherwise furnish any energy drink." The legislation would include a $100 to $500 fine for each offense. The alderman attributes the proposal to the increased consumption of energy drinks among adolescents and young adults. Burk sites the 5 deaths recently reported by the FDA which attribute the deaths to Monster Energy drinks. It should be noted that to date, none of the reported deaths have been proven to be caused by Monster Energy drinks or other energy drinks and Monster Beverage Corp. stands firm in the belief of the safety of its products for normal consumption.
Rodney Sacks, CEO of Monster Beverage Corp., recently defended his company's product line in the Q3 2012 conference call by saying the following:
"We believe that consumers are justified based on that long track record in having confidence in the safety of our products. A principal area of attention relates to caffeine. Unfortunately, there has been some misinformation published recently regarding the caffeine content of Monster. So let me give you the facts. Monster energy drinks generally contain approximately 10mg of caffeine per ounce from all sources. By comparison, the leading brands of coffee house brewed coffee, for example Starbucks, contain on average in excess of 20mg of caffeine per ounce. In other words, a 16 ounce can of Monster Energy contains about half the caffeine of a 16 ounce cup of coffeehouse brewed coffee. Even a 24 ounce can of Monster Energy, which contains about 240mg of caffeine from all sources, has about 30% less caffeine than an average medium sized 16 ounce cup of coffeehouse brewed coffee.
So again our products are just as safe for consumers as a cup of coffee purchased at your favorite coffee house. Even an extra large size single serving of a Mountain Dew fountain drink which is readily available throughout America contains about 234mg of caffeine. In addition, the amount of caffeine per ounce in other major energy drinks on the market is comparable to or higher than the amount in Monster. There is absolutely no basis for singling out Monster in this regard."
Capital Ladder Advisory Group agrees with everything the CEO has outlined to explain the ingredients in a Monster Energy drink as well as the comparisons offered to a cup of coffee. However, and here lies our problem with the CEO's explanation; in what world are teenagers drinking coffee in the amounts similar to the consumption rates of teenagers drinking Monster Energy or any energy drinks for that matter? The question we propose to the CEO is the underlying root of the problem. He's comparing coffee, which is consumed less by teenagers and adolescents than most any other beverage on the market except alcohol product, to energy drinks. There is no way that this should be the comparable product metric. If this is the defense the company has to offer, I'm of the opinion it is not only a baseless comparison but could prove to be highly irresponsible or even negligent by the company in the future.
The CEO is making a blanket comparison when and where he should be curtailing the conversation surrounding the topic matter until greater studies are revealed which outline the affects of increased caffeine consumption by teenagers and adolescents. Why do I say the CEO should curtail the topic of conversation surrounding the company's product line and whether or not they are safe for normal consumption by teenagers and adolescents? It's simple; you never make blanket statements without having all the data at hand. Unfortunately, there isn't enough data to go on and when you say your products are safe, as Rodney Sacks has claimed Monster Energy drinks to be, if you are proven wrong you are left indefensible. In my personal opinion, which every person is free to develop themselves, I feel Mr. Sacks did what he thought was best for the company's image and its investors share value. While in the short term it seemed to prove effective through the share price, long term it may prove ineffective as we are seeing once again in the most recent decline in share price. All it takes is one official study, just one by a panel of the FDA or assigned regulatory agency to find adverse side effects to teenagers and young adults who consume high levels of caffeine in energy drinks to launch a full scale campaign to limit ingredients or put forward certain bans on the product category. Such campaigns are obviously underway already.
Medical specialists say that healthy adults can safely consume 400 milligrams or more of caffeine daily. The drug, which acts as a stimulant, also provides benefits, like increased alertness. Far less is known about the impact of high caffeine use on teenagers, and specialists say the drug can pose dangers to those with undiagnosed health conditions like heart problems. Roland Griffiths, a caffeine specialist at Johns Hopkins University and an industry critic, said that high caffeine use by young people can cause a cycle of rushes and crashes that can add "a degree of variance to their moods and psychological well-being that they don't really need."
According to "Beverage Digest", overall sales of energy drinks in the United States grew an estimated 16 percent last year to $8.9 billion, a record level. Several countries are reining in sales of energy drinks, pointing to the risks of excessive caffeine consumption by teenagers and even some adults. By year's end, Canada will cap caffeine levels in products like Monster Energy, Red Bull and Rockstar.
Officials in Canada said they decided to take a uniform regulatory approach to energy drinks since they are sold alongside beverages. The new Canadian rules do not affect small energy "shots" like 5-hour Energy. However, the rules cap the level of caffeine in cans of energy drinks at 180 milligrams. So how do the new regulations affect the energy drink producers in Canada? Currently, the 24-ounce can of Monster Energy and other products like the 20-ounce Red Bull, which are both very popular in the United States, would not meet the new regulation guidelines and subsequently the producers will have to refine or reformulate the products to meet industry guidelines. In addition to the new rules in Canada, countries like Mexico, France and India have or are considering steps including taxing the drinks more heavily to discourage their use (Mexico has initiated higher taxation on energy drinks). It is painfully obvious now that the culmination of actions taken or to be taken by governing bodies around the world will likely result in higher costs associated with selling goods for Monster Beverage Corp. and industry participants. This is not just a problem for Monster Beverage Corp. but for Coca-Cola (KO), Pepsico (PEP), Dr. Pepper Snapple Group (DPS) and even Kraft Foods (KRFT) with its line of Mio energy drink enhancers. Each half-teaspoon serving of Mio, which is sold by Kraft Foods, releases 60 milligrams of caffeine in a beverage, the amount in a six-ounce cup of coffee, the company says. But one size of the bottle, which users can repeatedly squeeze, contains 18 servings, or 1,060 milligrams, of caffeine - more than enough, health specialists say, to sicken children and some adults, and even send some of them to the hospital.
Just to pour salt on an already open wound, the DAWN report was released last week. Here are just a few of the many details of the report.
- The number of emergency department (ED) visits involving energy drinks doubled from 10,068 visits in 2007 to 20,783 visits in 2011
- Among energy drink-related ED visits, there were more male patients than female patients; visits doubled from 2007 to 2011 for both male and female patients
- In each year from 2007 to 2011, there were more patients aged 18 to 39 than patients in other age groups involved in energy drink-related visits; however, the largest increase was seen among patients aged 40 or older, for whom visits increased 279 percent from 1,382 visits in 2007 to 5,233 visits in 2011
- In 2011, more than half of energy drink-related ED visits involved energy drinks only (58 percent), and the remaining 42 percent involved other drugs
Lastly, but certainly not least when we discuss sentiment and its effect on the price per share of MNST is the latest fear that well known hedge fund manager/investor David Einhorn of Green Light Capital may be eyeing MNST for a possible short position. If you are looking for reasons to short a stock, MNST certainly offers investors plenty of reasons. With the growth of sales slowing YOY and projected to continue this slide by consensus analysts' estimates coupled with increasingly poor investor sentiment by way of fears surrounding increased litigation and regulations, MNST could be David Einhorn's next big position. This is greatly speculative and possibly rumor mongering by the short selling community however as nothing has been offered for comment by Mr. Einhorn. I would be of the opinion that based on current valuation, strong cash position, speculative buyout opportunities and continued expansion of Monster Beverage Corp. throughout the world, this simply isn't the stock for David Einhorn to short. Monster Beverage Corp. is no Green Mountain Coffee Roasters (GMCR) or Herbalife (HLF) which were large short positions of David Einhorn in the past. Monster Beverage Corp. is no pyramid scheme or localized distribution company marketing its products in a single region. Monster is a global brand with global distribution and the company will push through the current waning sentiment, heightened degree of litigation and regulation. It remains to be seen how much of this push will come at the cost of the share price, though.
Additional Disclosure: Capital Ladder Advisory Group maintains no position in MNST. We continue to represent our clients' interest through delivering market research and analysis on Monster Beverage Corp. and will release our quarterly report ahead of earnings complete with our new price target, full scale analysis and estimates for 2013. For more information on MNST, feel free to contact us at email@example.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.