Monster Beverage (NASDAQ:MNST), the second-largest energy-drink producer behind Red Bull, is set to report its third-quarter earnings after the bell tomorrow. Let's take a look at what challenges the company faces heading into the results, and whether investors should buy, sell, or hold this energized stock today.
Drink it up
These days the market for energy drinks is about as turbocharged as the beverages themselves. Last year, Monster Beverage raked in $1.9 billion in sales of its buzz-worthy libations, and promising growth opportunities overseas mean this figure could continue to climb. However, the stock has stumbled lately as a result of allegations that its drinks are responsible for several deaths.
Specifically, shares fell more than 18% last month after Goldman Sachs dropped the stock from its "conviction buy list." The news came on the heels of the U.S. Food and Drug Administration's decision to launch an investigation into the company following the death of a 14-year-old girl who died after drinking a Monster Energy product. Four other cases have also been filed against the company, in which victims allegedly died after downing Monster Energy.
These lawsuits, while tragic, shouldn't have a long-term impact on the company. In fact, the 24-ounce Monster energy drink that the girl drank contained 240 mg of caffeine, which is significantly less than the 415 mg of caffeine found in a 24-ounce cup of Starbucks (NASDAQ:SBUX) coffee. Yet the coffee giant still sells billions of dollars' worth of its coffee beverages each year. Additionally, it's important to note that the girl in question had a heart condition. While the negative press surrounding Monster Energy has crushed the stock recently, I think the company's future remains bright.
What this boils down to is bad publicity. True, the FDA's investigation could spur increased government regulation on these products. But it will take more than that to slow down sales. Consider this: The FDA only has regulatory power over food and drugs. Meanwhile, energy drinks are considered a nutritional supplement, which is why they are currently less regulated than cigarettes.
Let's not forget that today tobacco is a multibillion-dollar industry, even with heavy government regulations and a universal understanding that cigarettes can cause cancer, birth defects, and other ailments. If this is any indication, it's likely that consumers will continue drinking energy concoctions such as Monster Energy, despite recent headlines.
Risk and reward
What I find more concerning is growing competition from private labels, such as Target's (NYSE:TGT) Archer Farms brand of sugar-free juice-based energy drinks. These products are often cheaper, which could present a problem for Monster if people switch to the more affordable options. Of course, Monster Beverage also faces competition from the leading soda makers like PepsiCo (NASDAQ:PEP) and Coca-Cola (NYSE:KO). While there had been speculation that Coca-Cola was considering buying Monster Beverage, the negative headlines surrounding the FDA investigation may have put a pin in the rumored deal.
Nevertheless, the pop kings have been rolling out energy products of their own in an effort to help combat slowing sales of soda. Pepsi entered the ring with its AMP Energy juice, while Coke began promoting a mix of concoctions including Full Throttle, Burn, and Gladiator. Even retail coffee star Starbucks made its energized debut this year with its line of "Refreshers" made from natural juice and green coffee extract.
Clearly, there's hardly a barrier to entry when it comes to making and selling energy drinks. Still, these competitive risks aren't going to eat into Monster's profitability overnight.
Importantly, Monster Beverage boasts a strong balance sheet. Zero long-term debt and loads of cash bode well for the company as it continues to expand into international markets. The energy-drink maker's solid network of third-party distributors includes heavyweights like Coca-Cola and Anheuser-Busch InBev. Solid marketing partnerships with these companies allow Monster Beverage to leverage its massive worldwide distribution systems, without having to pour large amounts of capital into building its own network.
Overall, Monster Beverage should continue to grow as it pushes into international markets. However, near-term challenges and increased competition in the space are keeping me on the sidelines for now. Don't get me wrong: I have no doubt that Monster Beverage will rebound from the recent FDA headwinds it's facing. However, I think investors will have a clearer picture of the company's growth prospects after it reports earnings on Wednesday.
Fool contributor Tamara Rutter owns shares of PepsiCo and Target. The Motley Fool owns shares of PepsiCo and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Goldman Sachs Group, The Coca-Cola Company, Monster Beverage, PepsiCo, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.