Is Monster Beverage Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Monster Beverage's (MNST -1.46%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Monster's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always be reported at a steady rate, we'll also look at how much Monster's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Monster's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Monster managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at Monster's key statistics:

MNST Revenue TTM data by YCharts

Source: YCharts and Yahoo! Finance. * Period begins at end of Q3 2009.

MNST Return on Equity data by YCharts

Source: YCharts. * Period begins at end of Q3 2009.

How we got here and where we're going
Is this why Monster's shares got slammed so hard in 2012? The popular energy-drink maker earns only three of a possible seven passing grades, thanks to weakening profit metrics. Despite its big fall, Monster's stock growth in the past three years still hasn't quite evened out with its EPS gains. Will this company get reenergized, or will it have a caffeine crash?

A lot will depend on the public, judicial, and legislative responses to the news that Monster must now face a lawsuit from the parents of a dead child who drank some of the company's caffeinated beverages. The FDA's latest response is quite positive, as it essentially minimized possibility of assigning blame for health problems on any of Monster's signature ingredients, which include taurine and guarana as well as caffeine. Industry analysts have also pointed out that Starbucks (SBUX 1.09%) offers some coffee drinks that far exceed the caffeine in a typical can of Monster.

These positive responses may not be enough to overcome a major drop in Monster's brand perception following the news. YouGov's BrandIndex tracked this recent decline in the consumer attitudes toward both Monster and privately held Red Bull, which sent the brands to their most negative consumer perception levels since mid-2009 . Monster's negative-18 (on a scale of negative to positive 100) brand buzz score fell to one of the lowest marks of the major consumer brands tracked by BrandIndex.

Negative consumer perception could boil over if more negative energy-drink news comes to light. Privately held 5-Hour Energy is also getting the spotlight shone on its products after reports of 13 potentially related deaths. As my fellow Fool Jeremy Bowman pointed out, the issues could turn the energy-drink market into a tightly regulated liquid analogue to the tobacco industry. Not that this would necessarily be a bad thing -- Altria (MO 0.49%) continues to be a high-yielding boon to millions of portfolios, despite the weight of multibillion-dollar judgments against it and its peers years ago.

Any regulation of caffeine-containing beverages would have to involve Starbucks, Coca-Cola (KO 0.68%), and Pepsi (PEP 1.65%) as well as Monster, and these are very well-funded companies that would push back hard against regulatory efforts. Any targeted restriction is likely to be ruled unconstitutional -- why would energy drinks be improper, but a cup of coffee all right? Should Monster's secondary ingredients be the problem, a reformulation would work. After all, Monster's already experimented with many varieties, including a coffee beverage and a protein-enhanced drink (for weight-lifting all-nighters).

Putting the pieces together
Today, Monster has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.