With Energy Drink Consumption Still On The Rise Monster Beverage Will Continue To Grow

Consumers are buying more energy drinks than ever offsetting risks for Monster Beverage and keeping PepsiCo, Inc. and Coca-Cola on the defensive.

Dan Moskowitz
Dan Moskowitz
Jan 22, 2014 at 12:00PM
Consumer Goods

If you follow Monster Beverage (NASDAQ: MNST), then you're well aware of the rumors about the health effects of the company's popular energy drink. Combine that with the potential of legislation that might lead to altered ingredients and marketing and you should have a company that investors would be wise to avoid. Valuation is a third reason why investors might consider avoiding the company, as Monster currently trades at 36 times earnings. However, while many investors have shied away from Monster due to various concerns, there are reasons why Monster should continue its ascent. 

Study results from Mintel
Mintel -- a global market research firm -- recently conducted a study on consumer perception of energy drinks.

Although 59% of Americans were concerned about the safety of energy drinks, the energy drink market grew sales at a 17% rate in 2012, as well as a 17% rate in 2013. Similar growth is expected through 2018. The reasons for the market's continuous growth are simple.

The world moves faster than ever before. Those who are in the new rat race, which is more about survival than the accumulation of wealth and power, are going to look for every advantage they can get. Now 56% of American consumers believe that energy drinks (and energy shots) increase their energy levels and alertness. Then consider all the people who need energy to help raise a family, exercise, drive long distances, or perform menial tasks throughout the day. This is where energy drinks provide what people need. Do they really need it? No. However, once a consumer begins down the mildly addictive caffeine road, it's difficult for that consumer to turn back. This is yet another reason for the consistent sales growth of energy drinks. 

Aside from health concerns, the one potential negative for energy drinks is that 35% of consumers see them as too expensive. This isn't likely to affect loyal customers who will remain willing to pay a premium. But if energy drink companies like Monster want to attract more new customers, then they might want to offer limited-time promotions. 

The conclusion for this segment is that health concerns aren't going to stop people from consuming energy drinks. This is a negative for the soft-drink market and Coca-Cola (NYSE: KO)

Coca-Cola is in a bind
Coca-Cola has gone head-to-head with PepsiCo (NYSE: PEP) for years. Though both companies have diversified in order to offset declining demand for carbonated beverages, PepsiCo has done this more effectively. Consider the top-line comparisons for Coca-Cola and PepsiCo over the past year. Also notice Monster Beverage's performance:

MNST Revenue (TTM) Chart

MNST Revenue (TTM) data by YCharts

There have been many rumors about Coca-Cola acquiring Monster Beverage, but they have never come to fruition, despite the fact that Coca-Cola distributes Monster Beverage energy drinks in the United States. Therefore, an acquisition would make for an easy transition, but Monster Beverage has continuously become more expensive and it currently sports a market cap of $11.57 billion. Coca-Cola might be hesitant to buy Monster Beverage because of the price tag as well as potential legislation that would negatively impact ingredients and/or marketing. Ironically, if no legislation occurs, then Monster Beverage will likely become even more expensive. 

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Monster Beverage could become a profitable revenue stream for Coca-Cola. Monster Beverage has the second-highest market share in energy drinks at 39%, second only to Red Bull with a 43% market share. Additionally, if Coca-Cola bought Monster Beverage this would prevent one of its competitors from beating it to the punch. On the other hand, it wouldn't be shocking news if one of the big soda companies made an offer for Red Bull if necessary. Anything is possible when potential profits are on the horizon.  

The bottom line
Monster Beverage is somewhat expensive for investors right now. Therefore, the stock could sell off quick if the company suffers bad news. On the other hand, Monster Beverage has two big positive catalysts going for it. One, consumers aren't backing off from energy drinks because of potential health concerns. Two, the potential of a purchase by a larger company could lead to a significant one-day uptick. Overall, the upside potential appears to outweigh the downside risk. However, please do your own research prior to investing.