The new millennium brought about the dawn of the energy business. In our ever-increasingly overbooked lives, we are now told that we need something to help us complete one whole day of activities. For shareholders of energy drink companies, it's been a caffeine-fueled rush to multibagger returns. But now, new scrutiny could potentially threaten the future of these companies. If you're invested in a liquid energy that isn't a three-letter word, you need to read this.
Super Citizen
New York City Mayor Michael Bloomberg, whether you agree with his politics or not, is an aggressive and effective politician. The namesake of the incredibly awesome Bloomberg terminal has put more and more bike lanes on the streets of Manhattan, required nutritional information for certain establishments, and just recently announced his intention to limit the sale of large sodas.
Now, the attorney general of NYC is beginning an investigation of energy drink manufacturers such as Monster Beverage (Nasdaq: MNST) and PepsiCo (NYSE: PEP). Specifically, the city wants to determine if the claims made by these companies are accurate, and if the ingredients are being used as they are intended as deemed by the FDA.
The fallout
It doesn't look as if the city wants to ban energy drinks, but this could draw significant attention to the products, especially if it is discovered that they are not what we think they are.
The investigation, officially, is looking into the "advertising, marketing, promotion, ingredients, usage, and sale." That may cover just about everything Monster does on a daily basis.
A big complaint is that Monster and Pepsi's AMP, along with Red Bull, are simply highly caffeinated beverages. The guarana, taurine, and whatever other ingredients are simply marketing gimmicks, and not actually producing noticeable results upon consumption. If this is proven to be true, then Monster, Pepsi, and 5-Hour Energy manufacturer Living Essentials would have to quickly redevelop their products, remarket them, and find a way of keeping up their fantastic sales numbers.
Shareholders beware
Could this have a material impact on the stock price of, say, Monster? Over the last five years, the stock has skyrocketed from around $20 per share to today's roughly $60 per share, at one point going as high as $83. The current P/E is over 33 times earnings, which is very high for a beverage maker. Pepsi, a much more diversified company, trades at 19.3 times earnings.
So, with Monster at such a rich valuation, the market expects only good things from the company. It could be quite susceptible to a disruption such as this investigation. Sales numbers likely would not be hit in a significant manner if there were a negative outcome in the New York investigation, but it could initiate further investigations and possibly lead to other major markets in the U.S. restricting the ability of these companies to market their products as the vaguely termed "energy drink."
Defensive maneuvers
Investors who want exposure to the most popular drinks ever held by a 13-year-old may be better off sticking with Pepsi or Coca-Cola (NYSE: KO). As mentioned, Pepsi is substantially less expensive than Monster on an earnings basis, and while it doesn't have the growth prospects of Monster, it is still a well-run, highly diversified company. An impact to its energy drink business might have short-term effects on its stock price, but Pepsi has more than enough products to make up for any loss in energy drink sales.
Coca-Cola also has product entrants in the energy drink arena. Its Burn energy shots are popping up in convenience stores everywhere, and you can find the typical outrageously decorated 16-ounce cans of caffeine and whatever else under various brand names owned by Coke.
Though you may miss out on some of the high growth Monster has witnessed and could continue to see, you will be protected from this potential industry disruption led by New York.
Beware of the Bloomberg, energy drink investors, beware.
A little more on Coca Cola
Coca Cola, separate from its energy drinks, is a top-tier business and one of the longest holds in Warren Buffett's portfolio. It is a stock with great growth potential given its immense size, and it also pays a hefty dividend. If you're looking for more great stock ideas for the long run, our analysts talk about Coke and two others Dow stocks that are dividend performers to help you retire rich in our special free report. Just click here to read it now.
