With shares of Monster Beverage Corp. (NASDAQ:MNST) now trading at around $47.50, is MNST a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Monster has dotted headlines for reasons both good and bad in the last two weeks. Last week, analyst firm ST Robinson Humphrey released data suggesting the company had increased its share of the thriving energy drink market after sales rose 17.8 percent for the month of September.
However, the good news was quickly overshadowed when a major lawsuit was filed against Monster in the death of a 14 year-old girl. The girl’s family is suing Monster for wrongful death, negligence, fraud, and other charges after the autopsy cited “cardiac arrhythmia due to caffeine toxicity” as the cause of death. The girl had reportedly consumed two 24-ounce cans of the company’s energy drink in a 24-hour span.
T = Technicals on the Stock Chart are Poor
As of October 24, 2012, Monster’s stock price is 12.43 percent below its 20Day Simple Moving Average; 15.12 percent below the 50 Day SMA; and 23.14 percent below the 200 Day SMA. Since the beginning of 2012, the stock price has risen to a mid-June peak, and then crashed on a severe downward trend. It is currently down 10.83 percent year-to-date and down 10.64 percent year over year.
E = Earnings Are Generally Increasing Quarter over Quarter
Monster’s earnings have generally been increasing over the last four quarters, with a stumble along the way that it seems to have overcome. The most recent quarterly number of 59 cents per share showed strong improvement from the previous quarter’s 41 cents per share and the year over year EPS of 45 cents per share.
Since earnings are growing quarter-over-quarter, the stock is firmly within our risk portfolio.
E = Excellent Relative Performance to Peers
Many investors favor Return on Equity as a key metric to how well the company is operating. Monster’s operational performance is at the top of its class when compared to rival drink makers. MNST has an ROE of 31.13 percent while rival Coca-Cola (NYSE:KO) comes in below that at 26.52 percent. Rivals PepsiCo (NYSE:PEP) and Dr Pepper Snapple (NYSE:DPS) also trail Monster with ROEs of 26.19 percent and 25.91 percent, respectively.
Operating margins are also critical for stock evaluation. Monster once again leads the competition with a margin of 27.51 percent compared to 22.38 percent for Coke, 13.92 percent for Pepsi, and 17.14 percent for Dr Pepper Snapple.
T = Trends May Turn Sour for the Industry in which the Company Operates
Despite recent concerted efforts by beverage giants like Coke and Pepsi to lure consumers away from energy drinks with new product lines that feature healthier alternatives, the punch-packing drinks continue to sell. Monster and privately-held competitor Red Bull saw the energy drink category grow 16.3 percent in the month of September.
However, headwinds may be brewing as a growing number of deaths have been linked to energy drink consumption and lawsuits are beginning to pile up. Public awareness seems to be building around the health risks associated with the sugar-laden drinks. One 24-ounce can of Monster, for example, contains the equivalent amount of caffeine of seven 12-ounce cans of Coca-Cola.
The legal proceedings stemming from 14-year old Anais Fournier’s death could become a serious problem for Monster. The plaintiffs are claiming that Monster “successfully avoided meaningful regulation of its product by the U.S. Food and Drug Administration” by classifying the drink as a “dietary supplement” and not a “food” product. Furthermore, the suit asserts that the energy drink maker provides alarmingly inadequate labeling and “does nothing to attempt to warn of these severe health risks.”
To be sure, Monster is facing a period of rough media attention, regardless of the outcome of the lawsuit. And if the company is found guilty, shares could be dealt a crippling blow.
So, while earnings and performance relative to peers look good, the potential for future disaster is too great right now. Additionally, we must remember that perhaps Monster’s most fierce rival, Red Bull, is a private company and therefore does not disclose statistics important for evaluation.
For these reasons, we’re calling Monster a STAY AWAY.
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