Monster Beverage (MNST) is getting a boost from consumers' need for speed, but company's stock and energy products could easily fall from their caffeine high.
Known for its distinctive tall can and ripped M logo, Monster is helping lead the energy-drink revolution as sodas and other carbonated drinks fall out of favor with Americans and consumers in many developed markets.
Carbonated soft-drink volumes in the U.S. fell 1.54% in 2015, on top of a 0.97% drop in 2014, according to Beverage Marketing Corp. Meanwhile energy-drink volumes have risen dramatically, up 7.94% in 2015 and 7.34% in 2014, on top of double-digit increases in recent years.
"Energy drinks have had very strong growth for over a decade now and the primary reason for that is there is a huge demand for energy and the products are well-formulated to deliver on that," said Gary Hemphill, managing director of research at Beverage Marketing.
Monster cans come in 16 fluid ounces and contain two servings. Each serving has 86 milligrams of caffeine vs. 95 milligrams found in a typical cup of coffee. The drinks often contain other stimulants like guarana, taurine and B vitamins.
"Consumers gravitate more toward things that are healthier for you, and consumers want variety and a change of pace," Hemphill said.
Monster declined requests for an interview.
Football-Themed Drink
But the company offers a variety of products including a low-carb version, Muscle Monster energy shakes and a football-themed version inspired by Rob Gronkowski, the energetic New England Patriots tight end who manages to simultaneously maintain a fun-loving lifestyle and still set National Football League records.
Monster and Austria's Red Bull are the two global leaders in the energy drink market. Red Bull has more market share in Europe, as it tapped into the EU market before Monster did.
But Monster leads in the U.S., the largest energy-drink market in the world with volumes at 629.3 million gallons last year, Beverage Marketing says. Monster is typically sold in the U.S. in a can twice the size as Red Bull, but at the same price.
Recent Downgrade
Monster generally has been a highly rated stock, but Wells Fargo downgraded it to market perform from outperform this past Monday. That sent the stock tumbling as the analyst warned on lower-than-expected sales and no new products until the fourth quarter.
But shares have gained back some ground since then, and remain in buy range. Shares ended trading up at the close Friday and were down fractionally at the close Monday to 160.07.
Monster was founded under the name Hansen Natural in 1935 before switching its name to Monster Beverage in 2012 to emphasize its focus on energy drinks. During its first-quarter conference call in April, Monster said that according to Nielsen data, U.S. sales of its energy drinks grew 10.8% while sales of Red Bull increased 4.1% and sales PepsiCo's (PEP) Amp decreased 8.1%.
Monster also is making headway overseas and saw market share gains during the first quarter in a slew of European nations. They include: Germany, France, Denmark, Belgium, Hungary, Ireland, The Netherlands, Norway, Poland and Sweden.
Much of Monster's international growth has come from Coca-Cola's (KO) ownership stake in the company. Last year Monster completed a deal to move its bottle and distribution to Coke bottlers and sold its non-energy drink assets, including Hansen's soda, to Coke. Coke sold its energy products such as its Burn drink, to Monster.
"This opens up new channels, new areas to get product into more storefronts," said Adam Fleck, director of consumer equity research at Morningstar.
"There have been lawsuits and continuing regulator concerns around the product," Fleck said. "A company the size of Coke has some concerns about going all in on energy drinks. Instead they have chosen to take a minority stake in Monster and get out of the business entirely."
Continued Growth
Fleck believes U.S. energy drink volumes will continue to grow in the high-single to low-double digits in the foreseeable future.
Monster consumers tend to skew younger and male, Fleck said. Monster sponsors extreme sporting events and athletes in motocross, BMX, mountain biking, surfing and snowboarding. It also has an athlete development program for kids ages 13-21.
IBD's TAKE: Monster shares are trying to recover from a mini-selloff after tumbling in the wake of an analyst's downgrade this past Monday, and remain about $4 short of a new high. The strongest player in the nonalcoholic beverages group is National Beverage. Its Stock Checkup is available here.
But with the addition of a line of Java-themed products that include coffee, cream and a "Monster energy blend" the brand is looking to expand its reach past its key demographic.
Monster is planning to launch its products in China later this year but warned during its first-quarter conference call that the launch could be delayed by regulatory approvals and finalization of distribution agreements.
Wrongful-Death Suits
Monster settled two wrongful-death lawsuits last year after teenagers died of cardiac problems after drinking the energy drinks.
Studies have shown that increases in blood pressure after drinking energy drinks can make people more susceptible to cardiovascular problems, and the World Health Organization said high caffeine levels can cause heart palpitations, hypertension and heart attacks in extreme cases.
Middlebury College in Vermont has banned the sales of energy drinks on campus as the Centers for Disease Control and Prevention say mixing energy drinks with alcohol makes people three times more likely to binge drink.
Because Monster relies so heavily on one product Fleck said investors need to have "a larger margin of safety" than with a more diversified beverage company like Coke, which relies on its signature drink along with bottled water and juices.
"Health concerns are a real downside risk in the Monster story," he said. "While the international growth rates remain pretty good, a U.S. slowdown will be a big risk."
