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Health concerns and broader category demand headwinds couldn't stop Monster Beverage (NASDAQ:MNST) from posting decent second quarter growth. Net sales increased 6.5% year-over-year to $631 million, slightly below consensus estimates, but still a solid number in our view. Earnings per share increased 4.6% year-over-year to $0.62, again falling slightly short of consensus estimates, but by no means terrible given some of the legal issues surrounding the company.

Demand for Monster products isn't experiencing the same robust growth as is it did years ago, but we are seeing the company outperform many of its peers. According to the data that management from Nielsen on the conference call, Monster's comparable sales jumped 16.4% year-over-year during July at convenience stores and gas stations (a key channel). Red Bull grew sales 8.7%, and competitors such as 5-hour Energy and Rockstar experienced single-digit declines during this same time period. Overall, Monster saw its market share in July jump 310 basis points year-over-year to 34%, just 1.4 percentage points below that of Red Bull.

Growth was similarly strong in the traditional store channel (up 10.1% year-over-year), while Red Bull experienced same-store sales growth of just 6.7%. It could be the several new flavors that Monster has recently launched (namely Monster Zero Ultra), or that consumers are simply forgetting about FDA headlines, but Monster is clearly gaining share in the United States.

After a few consecutive quarters of slumping margins, Monster Beverage returned to margin expansion as gross margins jumped 150 basis points year-over-year to 53.3%. From management's commentary, we gather that input costs weren't the driver of the growth in margin, but rather it appears a mix shift away from the traditional "Green" cans towards more Rehab flavors aided the strength.

On the other side of the cost equation, SG&A increased 170 basis points year-over-year to 24.9% of sales. This was mainly attributable to increased legal expenses, and unfortunately, it seems elevated legal spending is here to stay. This reality isn't much of a surprise to those that have followed Monster Beverage, as we've witnessed an increase in the number of incidents related to Monster consumption that get reported to the FDA. CEO Rodney Sacks clarified the ongoing battle with legal expenses, saying on the conference call:

"We think that some of the regulatory issues not so much came to a head, but we needed to address a number of issues back to the FDA, which we did. We anticipated the hearings at the Senate and the IOM. And so there were a number of issues that we addressed for the first time in preparing for it. And I think going forward, we won't have that same degree of preparation, which means we're at that same degree perhaps of intense litigation. But then there is other litigation continuing to go on, different litigation, different forums, and it all depends on what level they reach."

Without question, the FDA is better equipped to handle caffeine regulation than Valuentum is, but from what we've seen, we do not see a compelling argument for increased regulation. Additionally, the number of companies such regulation would negatively impact is so far-reaching--including Starbucks (NASDAQ:SBUX), Coca-Cola (NYSE:KO), and Pepsi (NYSE:PEP)--that it makes heightened regulation unlikely, in our view. Even any caffeine concentration regulation that might skirt soda would undoubtedly impact Starbucks' coffee. We'll keep a close eye on the situation, but the risk of overregulation may be a bit overblown.

Valuentum's Take

Even though Monster doesn't give external guidance, we think the firm's market share gains and strong comparable sales growth in the US demonstrate that Monster is well-prepared to see some acceleration in the second half of 2013. The company's balance sheet remains strong, but the biggest risk remains exogenous-the potential of more bad publicity related to a death or adverse event of a Monster consumer.

We do not think shares of Monster look like a bargain, so we won't be looking to add shares of the energy drink producer to the portfolio of our Best Ideas Newsletter at this time.

Source: Monster Beverage's Second Quarter: Can - Or Should - We Really Regulate Caffeine?