Monster Beverage (NASDAQ:MNST) had been one of the best-performing stocks of the past decade until it began to fizzle out last summer. A valuation-based decline gave way to health and safety including an FDA investigation, and finally a slowdown in sales followed. Investors wondering if Monster shares will return to its former glory need to be aware of the risk factors facing the company. In this excerpt from our premium research report all about Monster Beverage, we take a look at those challenges the company needs to overcome in order to shine once again.
The risks facing Monster Beverage are many, as the stock has lost about half its value since it reached another high around $80 per share in June 2012. Most recently, the Food and Drug Administration launched an investigation in late October 2012 that looked further into reports stating that five people have died in the last three years after consuming Monster Energy drinks. The investigation centers around a lawsuit filed by the mother of a 14-year-old girl who had a heart arrhythmia. The agency has not established causality between the energy drinks and the ensuing deaths, but the market reacted negatively nonetheless, sending the stock down 30% in the span of a week.
The consequences of the investigation are unclear at this point, but increased oversight of the little-regulated industry is certainly a possibility. The negative association could also drive away customers. Monster warns that children under the age of 12 and people sensitive to caffeine should not consume its products, but otherwise there are no advisories on its packaging. Earlier reports that the New York Attorney General was investigating Monster and other energy-drink makers have also weighed on the stock. On Nov. 1, 2012, the city attorney of San Francisco sent a letter to Monster asking the company to back up its claim that the drink was safe for adolescents and adults. More legal action from other government offices could be on the way.
Monster, of course, defended the safety of its products, saying that billions of energy drinks have been safely consumed around the world over the last 25 years, that its drinks contain less caffeine than the average 16-ounce cup of coffee, and that the ingredients and labeling comply with all rules and regulations in the countries in which it's available. Finally, Monster pointed out that the FDA has said that "adverse event reports" do not connote causality.
Several other more general business risks face the company as well. For example, the rise of energy shots threatens Monster's line of energy drinks. Growth in the energy shot market has far outpaced energy drinks, rising from $2 billion in 2007 to $4.7 billion in 2011. 5-Hour Energy dominates that market with 91% share, compared to just 1.4% for Monster's entry, Worx. The shots also offer additional advantages over standard energy drinks, such as price and convenience.
Similarly, Monster competes in a highly competitive, fast-changing, trendy industry. The rise of energy drinks has been speedy, but could just as easily be undone, or the industry could quickly change as consumer tastes can be fickle. Countertop machines such as SodaStream also present similar threats. Monster's prime advantage seems to be its brand recognition, but it lacks the product diversity of larger beverage makers like Coca-Cola and Pepsi. If energy drinks fall out of favor, Monster has little left in other categories to prop up sales.
If you found the excerpt above helpful, I encourage to pick up the complete copy of our research report, which features in-depth analysis on the company's opportunities, key areas to watch, and leadership. As a free bonus, it even comes with a year's worth of updates so you'll stay up to date with every quarterly report and any other piece of breaking news that comes out. To get your started with this exclusive new package today, all you have to do is click right here.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Monster Beverage. 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.