In the last year or so, Monster Beverage (MNST) has been enjoying a wild roller-coaster ride. The stock price has been so volatile that any good or bad news will move the stock price upward or downward by a good 10%. Many of the company's long-term investors are very happy with this aggressive growth company's results. However, there are a lot of concerns for those who bought the company's shares at or around peak price of $80 per share. Now the share price is all the way down to high $40s and the company enjoys one of the lowest P/E values it has seen in a long time, as the company's P/E ratio is around 20 after excluding the company's cash holdings. This is a low P/E ratio for a company that enjoys double digit growth year after year. Where does Monster Beverage go from here? Is it a falling knife or a great buying opportunity?
It looks like the company will be in trouble with the legal authorities for a while. After the FDA, some local governments are also showing concern for the health implications of the company's products. For example, the top lawyer of the city of San Francisco, Dennis J. Herrera, wrote a letter to the company asking for evidence that its energy beverages are as safe as it says they are. This may be just start of a series of letters the company is to receive from many local governments and agencies.
It looks like San Francisco is targeting to hit Monster at where it hurts the most: the company's marketing efforts. One of the company's marketing slogans have been "you can never have too much of a good thing." It looks like the lawyer of San Francisco believes that this slogan implies the teenagers that they will not get harmed regardless of the quantity of the Monster products they consume. California has a state law saying that companies cannot advertise on any health effects without having empirical evidence to back the claims. Monster Beverage responded to Mr. Herrera's letter publicly by stating that: ""the Company can document the legal basis by which its products are properly labeled dietary supplements…" and also that there is some "third party scientific documentation substantiating the safety of these drinks."
FDA is still investigating the relationship between consuming Monster Beverage products and the health hazards. In the last 3 years, there were six deaths and 15 hospitalizations that may or may not be related to Monster Beverage. Currently, the FDA continues to state that there is still not enough evidence to blame the company for deaths. It is very difficult to pinpoint the single cause of death in cases where the victim might have mixed energy drinks with other drinks such as the alcoholic beverages. If Monster energy drinks are dangerous for teenagers when mixed with alcohol, this should not necessarily be responsibility of the company. After all, teenagers aren't even supposed to drink alcohol, as the legal age to drink alcohol is 21 nationwide.
The California law is mostly concerned with the discrepancies between advertisement and the real health effects of a product. The chances of Monster getting banned in the state are very slim. The most likely outcome would have the company change the wording in its advertisements. According to legislation that passed in 2007, energy drink companies have an obligation to let the FDA know about any adverse effects seen in people consuming their products. It looks like Monster never informed the FDA about any adverse effects, but this could be because the company was never convinced that its products actually caused the effects.
According to the Dietary Supplement Health and Education Act (DSHEA) passed by the Congress in 1994, the products that are labeled as supplements rather than food get to enjoy a special status where they don't have to disclose their ingredients. Monster labels its beverages as supplements and it doesn't disclose the amount of caffeine in the drinks. This may come to a change in the future if a link between caffeine consumption and death is found. In the previous research, 400 milligrams of caffeine consumption per day was determined to be the safe limit for adults; however, the research targeting younger populations is too limited to draw conclusions on.
Apart from the legal concerns, is Monster Beverage a buy? The company has been achieving an impressive rate of growth in the past few years due to its successful marketing strategy and a portfolio of a wide range of products, but the company's growth might have slowed down recently. The energy drink market has been getting more crowded as some of the major players like Coca-Cola (KO) and Pepsi (PEP) entered in this market. In addition, companies like Starbucks (SBUX) and Kraft Foods (KRFT) are also seeking growth by entering in the energy drinks market. Monster will have to look at some less crowded markets outside of the U.S. for growth. The company's strategy is to introduce its products to a few new countries every quarter. So far, the strategy has worked well for the company and there are still many countries that the company hasn't entered yet.
I personally don't think that Monster's energy drinks will be banned. The chances of Monster drinks being banned are as much as the chances of cigarettes being banned (the last time I checked, they were linked to death too). The more likely outcome is that the company will be asked to revise its advertisements and marketing strategy. It is very likely that the Monster Energy will end up changing its marketing campaign to target adults and not the young teenagers. This may results in some slowdown in the company's American growth, but the overall growth story should stay intact as long as the market doesn't get too crowded with new players. There are several things that set Monster apart from the competition, such as the fact that the company offers more than 20 flavors to choose from, whereas most of the competition only has one or two flavors of energy drinks.
I think Monster will be fine in the long term. The investors that buy this company should be patient and they should be okay with volatility in the short term. I expect great results from the company in the medium to long term, but this will take some waiting. The company's share price has the potential to double in the next couple years. In the short term, this may look like a falling knife, however, in the long term, this is a great buying opportunity.