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Monster Beverage Misunderstood

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February 23, 2013 – Comments (0)

I have been reading a significant amount of commentary regarding two issues which are instrumental in the recent stock movement of MNST. I think both are misunderstood and neither one has any long term impact on furture value of the company. Let us start with the buyout rumors. MNST is repeatedly rumored to be a buyout candidate and every time this occurs, the stock price jumps. I will go on record as stating I do not believe MNST is a candidate for a buyout. To start Coke and Pepsi are the only companies that have any chance of acquiring MNST and neither has shown any real interest in doing so. The current market cap for MNST hovers around 8.7 billion. With expected revenue of 2.1 billion, this company would not be a cheap acquisition. Considering a five year ROI of nearly 30% and a one year ROI of more than 37% I would be shocked to see a sale price of less than 11 billion and an asking price of more than 12 billion would not surprise me one bit. This would be an extremely expensive acquisition for either company, even when you consider their respective sizes.

While MNST has shown slowed growth and margins, I attribute this entirely to international expansion. The current course outlined by MNST is expensive. There simply is no cheap way to expand internationally, so MNST is going to have to spend to be successful. Traditionally MNST has spent very little on advertising which has aided the bottom line. However, an international footprint will change that approach increasing the cost of expansion and impacting margins in the near term. Long term investors will need to be ready to stomach these drops in margin to benefit from growth over time, but I see no reason to worry if I were MNST executives and see no reason to agree to an acquisition unless the offer was astronomical.  So unless Coke or Pepsi plans on breaking the bank, I believe the chances of a buyout by either company to be slightly more likely than winning the lottery or being bitten by a shark. 

Now, lets take a look at the other news driving the stock price, dangerous product rumors. The market has recently run scared because MNST is being sued by the family of a young lady with a pre-existing heart condition, and reports of emergency room visits by people claiming to have consumed large quantities of energy drinks. While there is almost no causal link associated with these events, and clear evidence of other, non-regulated products in the market place with more caffeine than Monster drinks, Wall Street investors have decided this marks the end of the energy drink market as we know it. This to me is obsurd. McDonald's food is inherently more dangerous to the health of consumers than Monster Energy products, yet we do not see people clamoring about the risks associated with their product. The same is true for countless other products in the market. Second, even if Monster Energy products are shown to be a health risk, can you argue they are more dangerous than tobacco, a highly regulated product with years of negative events that seem to have had little impact on investments such as MO. In fact, I have owned MO for more than five years to the tune of 77% profit and there is no doubt their product poses a health risk for consumers. Finally, what about the human species suggests a tendency to avoid activities and products that are bad for our health, or any type of reasoning that suggests we make decisions about products or policies based on health risks or safety concerns, especially in MNST's target market (18-25 year-olds). We can't get politicians to agree on reasonable firearm regulations, but they fall all over themselves because of emergency room visits associated with the consumption of energy drinks. Worst case scenario, Monster puts a black box warning on the label and people purchase the product without a second thought.

Here's the deal, Monster has grown at an exponential rate during the past five or so years, blowing past Red Bull in the United States. The market share growth of the company is so strong Red Bull has finally decided to copy their marketing by adding flavors and selling their product in larger cans. Immitation is evidence of concern for any product or company. Need I remind you the company's growth plan in the US was handled flawlessly over the past few years. With slowing growth Monster has turned it's sights on the international market. One that is much more diverse and difficult to conquer. This and only this should impact any long term investment thesis. You either see growth potential or you don't. While downgrading MNST in the short term, S&P noted international growth as the driver of future revenue increases. 

So let the traders pump acquisition rumors and fears of product regulation for short term buying and selling opportunities. Investors should focus instead on long term product growth as the only story important to making the decision to buy, hold, or sell.  

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