Last Monday, shares of Monster Beverage Corporation (MNST) abruptly surged 20% intraday on rumors that Coca-Cola (KO) was in talks to buy the company. While Monster shareholders were undoubtedly thrilled at the time, in retrospect they probably wish they had been left in the dark until the deal was finalized, as the $2 billion increase in market capitalization occasioned by the rumor ultimately caused Coke to walk away from the deal--shares of the energy drink maker promptly fell back to earth and actually closed down 53 cents on the day.
Since then, the shares are roughly unchanged, meaning they are holding right around the level they were trading at prior to the announcement of the proposed Coke deal. Although Coke denied it walked away from the deal because of the sharp increase in Monster's shares, this seems like a disingenuous contention, considering all the benefits the soft drink behemoth would derive from purchasing Monster--in other words, valuation is the only legitimate excuse for not purchasing the company.
Monster is the number one player in the rapidly growing U.S. energy drink market with a 35% share of the market, well ahead of rival Red Bull, which controls 29%. Monster saw revenue rise by 30% over the past year to $1.7 billion--sales have grown by an average of 40% per year over the past nine years, while net income has grown by 62% per year over the same period. The company has no debt.
Coke could use a boost (no pun intended) in the energy drink department, as the company currently controls only 5.4% of the U.S. market. While some argue that Coke's existing distribution deal with Monster would reduce potential synergies from a proposed deal, the relationship between the two companies would likely make a merger easier to consummate.
The rationale behind this trade is short and sweet. Monster is a good fit for Coke, and given the energy drink company's strong growth record, betting on the stock wouldn't be the worst thing you could do, even if a deal fails to materialize.
That said, Monster trades well above 30 times earnings, making it far more expensive than virtually any other stock I have ever recommended. For this reason, I wouldn't shell out the money to buy a hundred share lot of the actual stock. Instead, I would get long Monster calls in order to profit from any potential deal. If you go far enough out in picking your expiration month, you may get some appreciation in the underlying shares (and thus make money as the value of your contracts rises) even in the absence of a deal.
Disclosure: I am long MNST calls.