Cloudy Sales Outlook, Not Legal Liability, Should Trouble Monster Beverage Investors

| About: Monster Beverage (MNST)
This article is now exclusive for PRO subscribers.

Reports to the FDA of several caffeine-related deaths have hammered shares of Monster Beverage (NASDAQ: MNST) lately, as the first accidental death lawsuit has been filed against the energy drink leader. The risk in this stock has always been its sky-high valuation, which investors were willing to accept given the company's astronomical growth over the last decade. News of health concerns has begun to compress that share price, but investors should continue to tread carefully.

As I pointed out on my blog back in March of this year, in a piece entitled As U.S. Stock Market Rises, Growth Stock Premium Widens Over Blue Chips, the valuation disparity between a large cap, diversified beverage leader such as Dr. Pepper Snapple (NYSE: DPS) and Monster Beverage have long looked out-of-whack. At that time, MNST was worth more than DPS, despite DPS's long list of strong brands and higher sales and earnings. Since then DPS shares have rallied more than 10%, while MNST stock has fallen more than 20%, but now Monster bulls have more than one problem to consider.

Interestingly, I do not believe the legal liability for Monster, as it relates to these accidental death reports, is going to be the real story for investors. As someone with a congenital heart condition, for instance, I know that vast amounts of caffeine would put excess stress on my heart, and therefore it is my responsibility to avoid energy drinks. The lawsuit brought against Monster does involve a victim with a pre-existing heart condition. Unless one can prove that Monster mislead consumers about the contents of its drinks, or that it broke a law, Monster's legal liability looks non-existent.

The FDA does not require energy drink labels to report actual caffeine levels. It does not appear that Monster has mislead, omitted, or lied about anything related to its drinks. If true, this lawsuit resembles someone suing a beer maker for alcohol intoxication. While tempting from those mourning the loss of someone close to them, such allegations likely won't get too far in the court of law.

That said, I believe Monster shares from an investment standpoint still should be avoided. The bigger question for investors is whether public attention drawn to the drinks themselves, and the possibility of health problems if consumed in excess, will curb sales of Monster, thereby limiting the company's future growth. As someone who is familiar with the studies looking at these caffeine-related issues (they are definitely dangerous), I believe the answer is likely to be a resounding yes.

With an $8 billion market value, even after being cut in half from its 52-week high, Monster Beverage's stock still has a lot of risk associated with it. Long term I would be surprised if the company's energy drink business grows as fast as current consensus expectations indicate. And that could easily prove accurate even if Monster is not found liable in these energy drink-related deaths.

Buyer beware, both as it relates to the stock and the product.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.