Shares of Monster Beverage (NASDAQ: MNST ) have been all over the map lately. In November, the stock nosedived to $39.99, as a result of regulatory concerns over the company's namesake energy drink. However, the rejection didn't last long. By mid-December the stock was back up again, trading above $57 a share. Nevertheless, this volatility continued into the new year, as analysts once again kicked around the possibility of Coca-Cola (NYSE: KO ) acquiring the energy drink maker.
Rumor or reality?
The stock market was abuzz last week with takeover talk. But before we get ahead of ourselves, let's not forget that this wouldn't be the first time the market wrongly speculated about a Monster Beverage acquisition. Last year, The Wall Street Journal published a story reporting that Coke was in talks to buy the Corona, Calif.-based company -- a deal that we now know never proved a reality.
Yet, unlike with last year's rumor, Coke hasn't openly denied the reports this time around. For the soda giant, buying Monster Beverage would give it a much-needed boost in the fast-growing energy drink sector. This is especially beneficial because energy drinks in general carry higher margins than carbonated soft drinks. Not to mention, Monster's operating margin of more than 26% is one of the highest in the industry.
KO Operating Margin TTM data by YCharts.
Additionally, a takeover bid would give Coke a leg up over archenemy PepsiCo (NYSE: PEP ) in the multibillion-dollar energy drink space. In the last few years, both Pepsi and Coke started mixing and selling their own energy concoctions in hopes of offsetting slumping soda sales in the United States.
Pepsi has its AMP pick-me-up, while Coke currently offers a mix of energy libations including Full Throttle, Burn, and Gladiator. Despite the massive marketing budgets these companies have, neither has been able to replicate Monster's success in the energy beverage category. In fact, both Pepsi's and Coke's shares of the energy drink market trail that of Monster Beverage .
Good to the last drop?
According to Bloomberg, "Monster Beverage's revenue climbed an average of 24% in each of the past five years, compared with average annual sales growth of 15 percent for Coca-Cola and 14 percent for PepsiCo in the same period." This impressive sales growth offers yet another compelling reason for Coke to gobble up the beverage company.
Of course, that's not to say a potential takeover would be cheap. Shares of Monster Beverage currently trade at around 21 times next year's earnings. If the deal were to go through, it would likely be one of the priciest acquisitions in the industry's history.
My fellow Fool Anders Bylund estimates the value of a possible Monster Beverage takeover to be around $10 billion. Meanwhile, Coke's biggest brand buyout up to now was the company's 2007 acquisition of vitaminwater drinks, which was valued at $4.2 billion. Given the high price tag and complicated nature of a Monster-Coke merger, a takeover deal is far from certain at this point.
What the future holds
Investors should instead be focused on the other opportunities and challenges facing Monster Beverage in the year ahead. International growth, for example, will play a key role in the company's performance during fiscal 2013. In 2011, only 20% of the company's gross sales were generated outside of the United States. However, international sales should increase as Monster Beverage continues to expand its distribution in emerging markets.
On the risk side of things, Monster Beverage faces considerable competition in the energy-drinks space. Companies with deep pockets including Starbucks (NASDAQ: SBUX ) and Jamba Juice have recently pushed into the market with more natural energy alternatives.
Last year, Starbucks launched its line of energy drinks known as Starbucks Refreshers. Unlike Monster Beverage's drinks, which were recently under investigation for heath concerns related to ingredients such as taurine, Starbucks Refreshers are made from real fruit juice and green coffee extract.
More recently, Pepsi launched a healthier caffeinated beverage that it calls Kickstart. While the soft drink maker refuses to call the new product an "energy drink," it is certainly being advertised as one. Pepsi's new beverage reportedly tastes like the company's Mountain Dew soda; only it's made with 5% juice, vitamins B and C, and added caffeine for that extra kick.
The energy drink market is certainly getting crowded these days as companies rush to cash in on the industry's fastest-growing segment. Despite the added risk this brings, I'm confident in Monster Beverage's strong position within the market. A deal with Coke may not be on the horizon just yet. However, the company reports fiscal 2012 fourth-quarter earnings on Feb. 27, which should give investors added insight into the year ahead.
The stakes are high for Monster Beverage these days. The stock had been nothing short of a rocket, but recent developments have sent shares spiraling downward. Health scares sparked a number of investigations at the state and federal level into the energy drink's role in several fatalities. With the company's value slashed in half, investors are wondering whether Monster Beverage is a value or a bust in the fast-growing energy drink category. Find out now in our premium research report, which details all the ins and outs you need to know about Monster Beverage, and even comes with a full year of updates to boot. Click here now to claim your copy and start reading today.