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Monster Beverage Has Been a ‘Monster’ Stock

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New York's crackdown on carbonated beverages continues, shifting from the sugary soft drinks targeted by NYC major Michael Bloomberg to the world of caffeine-fueled "energy" drinks.

The Wall Street Journal reported Tuesday that, in July, New York State Attorney General Eric Schneiderman issued subpoenas to energy-drink makers Monster Beverage (MNST), PepsiCo (PEP) -- which manufactures AMP -- and Living Essentials, LLC. The investigation, which could expand to other energy drink manufacturers, centers on whether the industry as a whole is misleading consumers about both the ingredients and health benefits of these often psychedelically packaged drinks. If this is found to be the case, the companies could be forced to pay fines and overhaul their marketing efforts. The AG investigation was first revealed by Monster in an SEC filing a few weeks ago, but the state in question was not specified until Tuesday's report.

Interestingly, Bloomberg reported Monday that an Italian study found energy drinks could have a positive effect on the heart function of already healthy consumers. But scrutiny into the energy-drink market increased quite a bit back in March of this year, after a 14-year-old Maryland girl -- who did have a heart problem -- died after apparently drinking two Monster drinks in 24 hours.

A Very Energized Stock

The debate over the over the health value and marketing efforts of these beverages, which the Journal article says compose 12% of the U.S. carbonated drink market, may rage on, but one thing is inarguable: Monster (the U.S. leader in the space) has been a very energized stock since the beginning of the 2000's.

Since January 3, 2000, according to FactSet, Monster -- known as Hansen Natural until January of this year -- has seen a 22,127% rise, placing it at the very top of the list of S&P 500 percentage gainers (it joined the index in June, as Sara Lee bowed out). The second stock on the list, Southwestern Energy Co. (SWN), has seen a rise of just 3,752% -- impressive, sure, but that gain is less than 1/5 of Monster's. To add even more perspective: Apple (AAPL), which recently surpassed Microsoft (MSFT) as the most valuable company ever by market cap (non-inflation-adjusted), has a 6th-place showing on the list, up 2,314% in the same time period.

Granted, Apple was at around $25 a share on Jan 3, 2000, while Monster was trading at a mere $0.27 (split-adjusted). Monster now trades at $59.56, while Apple -- having hit new highs since its victory in the Samsung patent trial -- is at $674. And year to date, Apple's percentage gain is more than double Monster's, at 64% as compared to 28%. But the decade-long performance of super-high-momentum Monster (and its massive 69,283% gain since it went public in August of 1995) is something to ponder. In the past five years, shares are up 164%, and in a two-year span, they have seen a rise of 159%.

Lots of Movement

Monster stock has actually seen quite a bit of movement in the past 52 weeks, trading in a range of $38.20 to $83.96, and is currently up 33% on the whole. Shares got a big boost in the spring amid chatter that Coca-Cola (KO) was interested in purchasing the company, which sells a large variety of high-voltage drinks -- in categories including Java Monster, Nitrous and Rehab -- across 45 countries. Those rumors, however, were quickly debunked. Coke does, however, have an agreement with Monster to distribute some of its drinks.

Earlier this month, shares plunged around 10% after second quarter earnings were released, missing analyst expectations. Net revenues were $592.6 million, up 28% from 2Q 2011 but still under consensus expectations of $596.1 million. Earnings of $0.59 a share missed expectations of $0.61, and the increased cost of beverage ingredients was cited in connection to a fall in gross margin from 52.8% to 51.8%.

Still, as CEO Rodney Sacks noted on the earnings call, sales were up 23% for the quarter overall, well ahead of close competitors Red Bull (19.8%) and Rockstar (7.6%). Sales of Pepsi's AMP actually slipped 2.2% for the quarter.

The company is also sitting on plenty of cash ($419 million, compared to $392 million at the end of last year) and holds no long-term debt, so it does have the bucks to support growth. Just this year it has expanded into countries including Japan, Hong Kong and Ecuador, which may have hurt gross margin in the short run but could prove beneficial in the long run. And earlier this month the company doubled the size of its share-buyback program to $500 million.

Monster shares are now trading a couple of bucks below what they were following the post-earnings plunge; the company's market cap is at $10.5 billion, and its PE ratio is at 33.27, according to Yahoo! Finance data. This is high compared to fellow subpoenaed-company PepsiCo, which has a P/E ratio of 19.3 (and obviously offers far more to consumers than Monster does). Coca-Cola, which also sells a line of energy drinks, trades at 20 times earnings. Monster stock has a beta of 0.16, according to Yahoo! Finance data, which means it is less volatile than the market as a whole (stocks that have a volatility mimicking the S&P, for perspective, have a beta of 1).

It remains to be seen what effect this investigation could eventually have on Monster, but immediately following the news, research firm Stifel Nicolaus predicted little effect to the company's sales, maintaining its buy rating and $74 target. The news also had little effect on the day's trade; Monster shares closed down just 0.92%. Pepsi closed down 0.07%.

CNBC's Herb Greenberg weighed in following Tuesday's headlines, speculating that the health issues are just one potential problem facing Monster; a possible peak in energy beverage growth, which has been on a tear, is another. The drinks are also on the pricey side, so consumer pullback in a tough economy could also be a negative factor for the company.

What goes up must come down? That remains to be seen. But certainly a growth spurt such as Monster has experienced in the past decade would be tough to replicate.