4 Loko Ban May Give Hansen Natural Shares a Better Buzz

| About: Monster Beverage (MNST)

All across the country, millions of students on college campuses have been mourning the loss of a dear friend. This friend, 4 Loko, was a caffeine-containing alcoholic beverage that was a staple of pre-games and parties during the fall semester. However, when politicians saw that kids were having too much fun (and occasionally going to the hospital), a lot of loud complaining led to the manufacturers of 4 Loko and similar beverages to recall the current product and reformulate it to be caffeine-free.

For those over the age of 23, the characteristics and appeal of 4 Loko may not be clear. It is made by a small, private, and relatively-new company called Phusion Projects. Each originally-formulated 4 Loko was a 23.5 ounce canned beverage containing a potent mix of sugars, caffeine, and alcohol, and it sold for about $3. It was 12% ABV (alcohol-by-volume) here in Pennsylvania, though the alcohol content was lower in some other states. Each can ended up providing the drinker with feelings normally induced by about five beers-worth of alcohol and the amount of caffeine provided by an energy drink. Though this may already sound excessive to people who haven't attended college in the past few years, it wasn't uncommon for some people to get "8- or 12-Lokos deep" - as in, consuming 2 or 3 cans. I guess, in hindsight, some of the accusations about dangerous consumption may have been true.

In this void, young adults will seek other beverages to replace 4 Loko and Hansen Natural's (HANS) Monster energy drink will be the go-to drink for many people. Monster has gained a much more favorable reputation recently and is increasingly the high-caffeine mixer of choice at both bars and private venues. Hansen's share of the energy drink market was 25.8% in mid-2010, which was 1.6 points higher than in 2009.

Calculating the potential benefit to Hanson is a bit difficult because 4 Loko sales figures weren't disclosed by the private company, but some public information can help estimate the size of the market. This article discusses a plant that's turning recalled 4 Lokos into ethanol for fuel, and the plant representative interviewed states that "a couple hundred 2,000-case truckloads" will be arriving at the plant, which is one of three plants across the country receiving beverages. Each 4 Loko case contained 12 cans, meaning that this plant may be processing about 4.8 million (12*2000*200) cans of beverage. Conservatively assuming that the other plants are a bit smaller, it seems like 12 million cans may have been recalled, which probably represents a quarter- or half-year of sales. Extrapolating this suggests that the market for alcohol-energy beverages may have been 25-50 million cans per year. (This seems reasonable, if not low, from what I observed at my university; I'd conservatively estimate that 4 Loko consumption was easily one can per person per week, so less than a million 4 Loko drinkers could account for the 25-50 million cans of annual sales.)

Assuming that drinkers who loved 4 Loko will continue to seek a caffeine/alcohol buzz, energy drinks will fill this void. It seems reasonable that sales of energy drinks will increase by one can for each alcoholic beverage not being sold. Assuming an incremental 40 million cans of energy drink sold, coupled with Hansen's 25% share, Hansen could easily sell an extra 10 millions cans of product per year. Ten million additional cans would create roughly a 1% boost in revenue ($1.3B in 2010) and a couple-cent increase to annual earnings per share (estimated to be $2.37 this year). Additionally, once young adults are picking up Monster for evening entertainment, they will be likelier to pick it up to help conquer the next morning's hangover, boosting sales even further. Hansen, and other energy drink makers, seem like they will materially benefit from 4 Loko's demise.

Of course, there are still plenty of other options for alcohol enthusiasts; Natural Light (NYSE:BUD), Milwaukee's Best Light (SABMiller - OTCPK:SBMRY), or Keystone Light (NYSE:TAP) are just a few of the familiar options for budget-minded university students. However, for the many people who became accustomed to the potent caffeine-and-alcohol mix that 4 Loko delivered, energy drinks will remain a necessary ingredient for a night out. For that reason, Hanson Natural and its shareholders may realize a very real benefit from the 4 Loko ban.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.