Monster Beverage (NASDAQ:MNST), the energy drink maker and supplier behind the Monster Energy and Java Monster brands, was down 14% yesterday and 3% in after-hours trading, as an FDA probe into its energy drinks cited in death reports took its toll on the stock. The stock has declined almost 30% in the last three months after missing its Q2 earnings expectations. The current price of $45 makes the stock attractive, despite the ongoing investigations and lawsuits, which are a shorter-term concern. The consensus target price is $72. We recommend buying Monster due to better valuations and international growth opportunities.
The Food and Drug Administration said yesterday that it was carrying out an investigation regarding five deaths associated with Monster energy drinks. The incidents were reported voluntarily and investigations have not been completed. The company was sued by the family of a girl who suffered from a heart condition and had consumed two cans of Monster Beverage energy drinks before her death. The lawsuit says that the company does not list the amount of caffeine in its formula, and seeks more than $25,000 in damages.
The company has denied that the drink may have been responsible for the girl's death. In a statement, the company said that it had sold 8 billion energy drinks around the world and does not believe that its beverages are the cause of the teenager's death.
Energy drinks are not going to face anything as severe as getting banned, but we might see some regulations regarding the marketing and labeling of energy drinks. Caffeine limits for sodas might be regulated in more detail. Concerns over energy drinks are not new -- for instance, there were letters written by Senator Dick Durbin to the FDA in April and last month asking for investigations into the effect of energy drink ingredients on adolescents and children.
Last year, Coca-Cola (NYSE:KO) and Monster had discussed a deal for Coca-Cola to acquire the energy drink maker, according to a Reuters article. This means that Monster might be an attractive takeover candidate for bigger companies like Coca-Cola and Pepsi (NYSE:PEP), whose own energy drinks have smaller market shares. Energy drink sales have been growing at a very fast pace, with a CAGR of 28.8% from 2001 to 2011, in the U.S. Sales were $9 billion last year, according to Beverage Digest. Monster is currently the market leader in terms of volume with a 39% market share. Red bull is the leader in terms of total revenues, as its drinks are priced at a premium. Pepsi and Coke's drinks are smaller competitors. According to Beverage daily, the recent slowdown in growth might mean that the energy drink sector has reached a saturation point due to a lack of innovation on behalf of energy drink companies like Red Bull to attract aging customers and a trend toward healthier alternatives. However, for Monster, sales were up 17.8% (Nielson data) for the month of September as compared to August's performance of a 15.9% gain. The energy drink category as a whole grew 16.3% in September, which means that Monster might have gained market share.
The company had missed analyst estimates for EPS in Q2 2012 by 2 cents, although it increased 31% as compared to Q2 2011. Revenues also missed expectation by $3 million, but were up 28% year over year. The stock fell from $67 to $54 in two days after the earnings release. Analysts expect Monster to post $2/share for 2012 as compared to $1.53/share in 2011. The fundamentals of the company are healthy with a zero debt-to-equity ratio. The company also increased its share repurchase program to $500 million as of Aug. 13. This is around 6% of the current market cap.
The trailing 12 months margins are higher than their five-year averages. Analysts are expecting EPS growth of 27% for Q3. Q3 results are due on Nov. 5. Analysts expect earnings to increase by 15% in the next five years as compared to Pepsi's 5% and Coca-Cola's 8%. The forward P/E for the company is 18 times as compared to the forward P/E multiples of 16 times and 17 times for PEP and KO, respectively. Thus, the higher multiple is justified by the higher growth opportunities for Monster Beverage.
Goldman Sachs has a buy rating on the stock, while Citigroup analysts have a neutral rating with a $68 price target. We think that this dip is a good opportunity to buy Monster given that the company plans to expand into more international areas -- including Hong Kong, Ecuador, and Japan -- in Q2, and other markets in the second half of this year (fiscal year) as well as in early 2013. The fundamentals look strong, and the concerns over the investigations are short term and have already been priced into the stock.