Monster Beverage: Not as scary as it looks

A lawsuit and earnings miss won't overshadow solid growth forever.

By InvestorPlace Nov 13, 2012 12:35PM
 Wall Street, trader, stock market, investing, phone, businessmanBy James Brumley


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Against the backdrop of allegations that its product may be the cause of a teen's death, the last thing energy-drink maker Monster Beverage (MNST) needed was weak quarterly results.

   

But as they say: When it rains, it pours.


While the company did grow year-over-year in the third quarter -- with revenue up 14% and earnings up 5% -- it didn't improve as much as analysts expected. The top line went from $474.7 million to $541.9 million, but that fell short of the slated $578.4 million, just as its EPS of 47 cents per share fell short of the anticipated 55 cents.


Such disappointing numbers were especially a shame considering that the third-quarter results extend what's become a decent streak of earnings growth -- one that's only been briefly and barely interrupted and is expected to continue. In 2013, analysts estimate there will be a hefty 23% increase in profits.


Given the stock's current price, shares are trading at a fairly palatable 19 times future earnings. That's frothier than the market's average, but Monster Beverage's double-digit growth rate justifies a premium price.


So why hasn't the stock budged since plunging to $45.73 in late October? Because this story has practically nothing to do with earnings -- and everything to do with perception.


The headline story

Let's start with a quick recap of the aforementioned allegations. In late October, parents of now-deceased 14-year-old Anais Fournier filed a suit against Monster Beverage, claiming that their daughter's cardiac arrhythmia was induced by her consumption of Monster’s caffeine-laden drinks.


The teenager reportedly drank two 24-ounce cans of Monster's energy drink over the course of two days, taking in 480 milligrams of caffeine as a result. If that sounds like a lot of caffeine, it is.


Kind of.


A 16-ounce caffe latte from Starbucks (SBUX) comes with 150 milligrams of caffeine, and it's not unusual for the Starbucks faithful to consume two per day.


Or, try a 12-ounce can of the flagship drink from Coca-Cola (KO), which has 34 milligrams of caffeine in it. It sounds like a lot less, but who drinks "just" 12-ounces of anything anymore? The 20-ounce plastic bottle -- or a 20-ounce "medium" at most fast food restaurants -- is a more realistic serving and it's not unusual for a consumer to guzzle two or more of those per day. That's easily 113 milligrams of caffeine in a seemingly-benign beverage.


Even a regular-sized No-Doz pill is a 100-milligram jolt of caffeine and the reality is that young people can and do eat them like candy -- with little to no ill-effects other than being sleep-deprived.


Point being, taking in large amounts of caffeine is hardly uncommon these days, so it's unlikely Anais Fournier's parents are going to be able to make enough waves to dent the energy-drink industry's sales.


The long-term reality

It's a nerve-racking situation for investors to be sure. On the one hand the loss of a young life is tragic -- the kind of dramatic story that can be used to create change. On the other hand, investors know all too well that drama tends to be short-lived, ultimately yielding to profits again.


Make no mistake: There are dozens of recent examples of industries surviving setbacks they weren't supposed to survive.


Remember the tidal wave that devastated Fukushima, Japan and caused a disastrous meltdown of a nuclear-power reactor? Observers were sure it would mean the end of the entire nuclear power industry and some plants even shut down. As of today, the number of planned nuclear power plants continues to grow.


Or, remember the 2010 oil spill in the Gulf of Mexico? Many presumed that the liabilities cause by the accident would cost BP (BP) more than it could ever possibly pay, and ultimately force the company into bankruptcy. Not only is BP nowhere near bankruptcy, it's actually doing quite well, and shares are trading well above the bottom they made in the wake of the disaster.


On top of that, Monster hasn't been completely stuck in the mud, even in the wake of these headwinds. The earnings news got MNST shares off to a bad start last Thursday -- pushing them almost to a new 52-week low -- but they rebounded well. The stock ended up right about where it after news of the lawsuit first came out.


After all, though shy of estimates, the growth was still outstanding.


In other words, this dip we're seeing from Monster Beverage is ultimately a buying opportunity. It's just going to take a while for the rest of the market to believe it.


As of this writing, James Brumley did not own a position in any of the aforementioned securities.


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