On Jan 21, we initiated coverage on Monster Beverage Corporation (MNST) with a Neutral recommendation. Although the beverage company enjoys a strong portfolio of iconic brands and a significant international presence, we remain on the sidelines due to its weak top-line performance.
Why a Neutral Recommendation?
We are encouraged by Monster Beverage’s commanding presence in the fast growing energy drinks markets.
Monster Beverage offers a wide range of products under energy drinks, juice based and soda beverages categories. The company offers beverages under brands such as Monster Energy, Java Monster, X- Presso Monster, Worx Energy, Peace Tea, Hansen, Junior Juice, Blue Sky, Hubert’s, Vidration and Monster Rehab. With the energy drink market gaining momentum, Monster Beverage has huge potential in the near future.
Monster Beverage generates a significant portion of its revenues from outside the U.S. The company operates in over 100 countries across the world. In fact, expansion of the Monster Energy brand in the international market contributed significantly to net sales in third quarter 2013.
In order to cater to the ever changing taste and preference of consumers, Monster Beverage continuously introduces new products. During 2013, the company launched Monster Energy Ultra Blue in March and Monster Energy Ultra Red in September, which have been extremely successful. In 2014, the company intends to introduce juice cocktail under the Peace Tea brand. The company will also launch the Punch Monster product line in 2014.
However, Monster Beverage like other beverage giants is seeing sluggish sales due to softness in the North American beverage industry. The company’s new Monster Energy branded Zero Ultra and Ultra Blue energy drinks cannibalized sales of the existing brands, hurting overall top line.
In addition, the company has been facing legal issues related to the impact of energy drinks on the health of its consumers. Monster Beverage energy drinks contain 160 milligrams of caffeine in a 16-ounce can. The company finds itself in the midst of several controversies about whether its energy drinks are safe for consumption especially by children and adolescents. The Food and Drug Administration is currently investigating the impact of caffeine in food and dietary supplements, which includes Monster Beverage products. The report is pending. Any undesirable changes in regulations will impact the company’s operations. The company is also incurring high professional services costs related to legal issues which hurts margins. However, in Dec 2013, the company claimed that its leading energy drinks contain half the amount of caffeine compared to coffee and hence are safe for consumption.
Monster Beverage carries a Zacks Rank #2 (Buy). Other consumer goods stocks worth considering include The WhiteWave Foods Company (WWAV), Coca-Cola HBC AG (CCH) and The Hain Celestial Group, Inc. (HAIN). The WhiteWave Foods Company carries a Zacks Rank #1 (Strong Buy) while Coca-Cola HBC and Hain Celestial carry a Zacks Rank #2 .