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Monster Beverage Lawsuit Much Ado About Nothing

By Chris Baines - Oct 23, 2012 at 10:16PM

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Ignore the panic.

Yesterday, Goldman Sachs (NYSE: GS) removed Monster Beverage (MNST 2.60%) from its conviction buy list. The market's reaction was another double-digit drop, like Monday's

Boy, a stock gets more than 20% cheaper for pretty much no reason and everybody decides it's suddenly a sell? Doesn't sound like Foolishness to me. 

I hate to say it, but this whole thing with the FDA and the lawsuit strike me as a non-issue. Though my heart goes out to the family for its loss, we don't even know for sure if the drink was the culprit, and I think it's safe to say that almost anything will kill you if you drink enough of it -- even water. Somebody, somewhere, somehow, has probably died from overdosing on Starbucks' (SBUX 3.87%) coffee, but we've just never heard about it. And it'd be a lot easier, too, as a 16-ounce coffeehouse java has significantly more caffeine than the large 24-ounce Monster Energy cans the girl in question downed.

And let's not forget the slow and silent death from obesity that mainlining seemingly "safe" normal soft drinks can lead to. Which is why, by the way, I think Coca-Cola (KO 1.88%)PepsiCo (PEP 1.24%), and Dr Pepper Snapple (DPS) are moving toward diet soft drinks such as Coke Zero, Pepsi Next, and Dr Pepper Ten. 

I don't mean to trivialize the death of an innocent. But I hardly think its fair to attack Monster for it. The cans already carry warning labels (unlike coffee) for children and those sensitive to caffeine, and the alleged victim was part of both discouraged categories (she was 14 and had an inherited heart condition). Also the 24-ounce can is bigger than the 16-ounce ones I much more commonly see in stores.

If energy drink manufacturers -- including Coke and Pepsi -- want a quick and easy way to appease lawmakers, I imagine getting rid of 24-ounce cans would be a relatively painless solution. (I know, I sound like Mayor Bloomberg.) Stricter voluntary labeling also wouldn't hurt consumers, or shareholders. 

A silver lining
My Monster concern -- pardon the pun -- has always been competition, a.k.a. barriers to entry, or lack thereof. As we've seen with tobacco, litigation tends to scare competitors away and leads to a more concentrated industry. We could see the same thing happen here with energy drinks, and that will benefit Monster and RedBull via pricing power.

Also, to the extent litigation hangs a cloud over the share price, that simply makes the company's $500 million share buyback plan  more potent. Think of the gains that U.S. tobacco shareholders have made from dividend reinvestment into historically undervalued tobacco stocks (though I think they're a bad value today). Dividend reinvestment and share buybacks make you richer as long as a stock is unfairly underpriced. 

And this is now the case for Monster, as it's a bargain. While Monster and Coke are both CAPScalls and share the same reasonable forward P/E, Monster has much better growth prospects as the company expands abroad.

Be forewarned, however, that Mr. Market may continue to unfairly punish Monster is the short term. What is cheap may become even cheaper. (Think U.S. tobacco in the late 1990's.) But for long-term investors it would not surprise me if Monster became a stock to retire on.

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Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
$63.04 (1.88%) $1.16
Pepsico, Inc. Stock Quote
Pepsico, Inc.
$166.13 (1.24%) $2.03
Starbucks Corporation Stock Quote
Starbucks Corporation
$78.11 (3.87%) $2.91
Dr Pepper Snapple Group, Inc. Stock Quote
Dr Pepper Snapple Group, Inc.
Monster Beverage Corporation Stock Quote
Monster Beverage Corporation
$94.58 (2.60%) $2.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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