If you had bought Hansen's Natural, a maker of natural juices, back in 2002, you would have gained more than 1,400% on your original investment! Ironically, Hansen's biggest growth driver wasn't anything natural -- it was the sugary, highly caffeinated Monster energy drink that amped its returns. Hansen has since changed its name to Monster Beverage (NASDAQ: MNST ) to align the company with its flagship brand -- of which it sells more than 5 million cans every day. Recently, though, Monster Beverage has faced legal and regulatory challenges regarding the safety of its product. That has investors asking whether this Monster is still poised to ring up huge profits.
Plenty of room to grow
Since it's hit the shelves, Monster has grabbed 37% of the domestic market, competing with the likes of Red Bull, Rockstar, and Amp, which own 42%, 11%, and 4% of the market, respectively. Last year, energy drinks generated almost $12.5 billion in sales; by 2017 sales are expected to skyrocket to $21.5 billion. If Monster merely maintains its current market share, it's projected to reach $8 billion in sales by 2017, up from just more than $2 billion in 2012.
The green beast has been aggressively expanding in Europe, as well as key emerging markets like India. Although older rival Red Bull is sold in more than 160 countries, Monster should be able to leverage its key distribution agreements with Coca-Cola -- sold in every country in the world except for Cuba and North Korea -- and Anheuser-Busch to expand beyond the 90 countries in which it's currently distributed.
Health concerns holding back stock
Tragically, Monster's energy drinks are the alleged cause of several deaths. A lawsuit was filed in October 2012 asserting that consuming two Monster drinks over two days resulted in the wrongful death of a 14-year-old girl in Maryland. Monster says it plans to "vigorously defend" the suit in court, saying the girl suffered from a preexisting heart condition and that no blood test was performed to confirm that the girl died of "caffeine toxicity."
Monster was hit with another lawsuit this June, claiming that the death of a 19-year-old man in California was caused by drinking two Monsters a day for three years straight. A spokesperson for Monster stated: "The lawsuit admits that Mr. Morris consumed Monster Energy Drinks for years without incident. Simply because Mr. Morris happened to have consumed a Monster Energy Drink or two on the day of his cardiac arrest does not establish any causal connection between the two."
Compounding these hurdles, both the American Medical Association and the American Academy of Pediatrics issued statements declaring that energy drinks should not be marketed to children under 18 years old. In early May, the city of San Francisco filed a lawsuit alleging that the company targets children with marketing for its energy drinks. Monster responded in kind, filing a countersuit against the city in federal court to claim that it is being unfairly targeted by the city attorney. In New York State, proposals have been introduced to limit the marketing of energy drinks to minors and ban their sale in public parks. In Chicago, a local official upped the ante with a proposed ban on the sale and distribution of energy drinks to all consumers.
To put these claims in perspective, it is estimated that more than 50 billion energy drinks have been sold worldwide over the past 25 years, including more than 9 billion cans of Monster since 2002. Though the threat of government regulation and concerns over product safety should not be taken lightly, the company is quick to point out that Monster has about half as much caffeine per fluid ounce as a Starbucks coffee. I believe that these legal threats are a passing concern and will not have a lasting effect on future demand for Monster's products.
Still a buy?
When news of pending litigation surfaced, Monster's stock was rocked for a 16% loss. Monster has since bounced back, but with the stock nearly 10% off its 52-week high, investors are taking a wait-and-see approach. Although the company trades at a higher earnings multiple than its peers, its strong free cash flow, impressive operating and net margins, high return on equity, and a history of earnings growth make this one monster not to be scared of.
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.