It’s been a strange year so far Monster Beverage (NASDAQ:MNST), the marketer and distributor of Monster Energy brand energy drinks, and it appears the strangeness is here for the long term.
The stock was flirting with $100 per share levels before the company announced a 2-for-1 split back in January when life was going oh so well. The stock popped a bit in February and topped out at a split-adjusted price of just over $83 during a summer run-up.
It hasn’t been much fun since that point however, as scrutiny over the alternative beverage industry has slowly but steadily eroded market confidence. MNST has dropped nearly 30% in the last three months, including a nearly 10% drop just in the last five days. The stock is down again in Friday morning trading
So what’s going on? First and foremost, understand that the energy-drink business is huge, accounting for about $9 billion per year and representing around 12% of all carbonated soft-drink sales worldwide. Monster is the leader in the U.S., with close to a 39% market share.
Soft-drink titans Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) have tried to pry their way into the market, with Coca-Cola speaking with Monster about partnership possibilities. And, of course, Austria’s (privately) held Red Bull is nearly synonymous with the energy-drink industry, and it has the highest worldwide share of revenue.
Bad press for the segment has been its bugaboo, as government regulators take aim at concerns over the practice of mixing energy drinks with alcohol, the labeling of the products and the levels of caffeine in them. The fallout across the entire segment is wide:
- New York Attorney General Eric Schneiderman has been investigating Monster, PepsiCo and Living Essentials, the maker of 5-Hour Energy Drinks, to determine whether the companies are misleading consumers about how much caffeine the drinks contain and the health risks they could pose.
- Illinois Senator Richard Durbin (D) and Connecticut Senator Richard Blumenthal (D) have raised concerns over the impact of caffeine found in the energy drinks on children and adolescents.
- Monster is now the target of an investigation on behalf of a group of investors regarding breaches of fiduciary responsibility around possible false/misleading statements in its advertising, marketing and promotion of its energy drinks, which affected the company’s financial statements.
- In the latest development, the New York City Board of Health on Thursday approved a proposal to ban the sale of large sugary drinks in restaurants and other venues. While the measure is aimed at combating obesity, caffeine levels in soda are another source of concern among regulators.
None of the possible outcomes from any of these actions can come to much good, and costs could be prohibitive on both the legal and regulatory ends. The net result is a $1 billion-in-revenue company stuck in neutral as investors try to sort out what to do next.
Lost in the shuffle is that Monster performs extremely well: Quarterly revenue growth is well into the high 20% range, and net income also continues to show an upward trend. Cash balances are now at $870 million, with free cash flow a solid $68 million at June 30.
A trailing P/E of 29x earnings doesn’t really appear too steep given Monster’s growth performance. In fact, at 21x forward earnings, perhaps some skepticism is baked into next year’s numbers.
Make no mistake, however, the industry is under intense scrutiny, if not siege. Investors should brace themselves for the next jolts to hit energy-drink makers.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he did not hold a position in any of the aforementioned securities.