Analysis - The yin and yang of Monster Beverage's fortunes
Monster Beverage has seen US sales growth slow
Monster Beverage Corp has attracted a lot of conflicting viewpoints over the past month.
Around two weeks ago, Morgan Stanley analyst Dara Mohsenian downgraded Monster stock from “over-weight” to “equal-weight” because of a slow down in its US sales growth as well as risks arising from Monster's myriad legal and regulatory challenges. The downgrade, as well as media coverage that same day of another lawsuit, saw Monster's shares drop by 4.5%.
Since then, however, analysts have come forward to back Monster's prospects and the share price has rallied somewhat. These defenders claim Monster still has a lot of growth potential, especially over the long term.
So which view is correct? And what can this tell us about the current state of the energy drinks market?
Helpfully, yesterday saw the issue of two analysts notes that ably demonstrate the yin and the yang of the Monster portfolio.
On one hand we have CLSA's Caroline Levy, who shares a lot of the concerns Mohsenian listed last month. However, in her note headlined “Too Many Headwinds” Levy, adds one more challenge to Monster's list of obstacles - mounting health concerns over sugar intake.
“Monster is foremost an energy drink company, but it is also a carbonated soft drinks (CSD) company,” Levy writes. “Its domestic sales have been remarkably immune from anti-CSD sentiment and even from fears around energy drink ingredients. However, we believe it may have hit a tipping point on this score.”
In Levy's eyes, Monster has now joined the ranks of beverage firms, including the Coca-Cola Co and PepsiCo, that need to face up to health lobby efforts to wean consumers off a growing sugar intake that has been linked to diseases such as diabetes.
Rushing to Monster's defence, meanwhile, is Wells Fargo's Bonnie Herzog, who sidesteps the health concerns and instead targets Monster's blooming product pipeline.
The analyst has it on good authority that Monster is ready to roll out Ultra Sunrise, an extension to its successful no-calorie Ultra line. Sunrise is likely to go head-to-head with PepsiCo's so-called “breakfast energy drink” Mountain Dew Kickstart and will therefore be able to extend Monster's consumption patterns into the early part of the day, Herzog said. Combine that with possible low- or no-caffeine versions of other Monster brands, for afternoon and evening consumption, and the company will be able to straddle the whole day and entice new consumers into its orbit.
As sales growth slows in the US, Monster is keen to broaden its appeal as much as possible. And while international sales have recently proved strong, some analysts, including Levy, are worried that the company is expanding too fast overseas, and into markets such as eastern Europe that hold little hope of good growth.
Having said that, sales growth is slowing mainly because the rapid acceleration of a few years ago was never sustainable. For investors, the slowdown is not good because it reduces share price, but in business terms it is inevitable. And after all, the energy drinks category is still outperforming CSDs in the US as younger consumers ditch brands such as Coca-Cola and Pepsi for Monster and Red Bull.
What will concern the energy drinks makers more is the possibility of their products being targeted by anti-sugar activist, who have so far succeeded in shining a spotlight on sugar levels in CSDs.
Monster has previous with this, as it has been forced to deal in the past with concerns over caffeine intake, particularly by younger consumers. This fresh risk, however, if Levy is correct, would pit it against a global movement that has already seen governments in France and Mexico enact sugar taxes to curb obesity-related disease.
As Coca-Cola and PepsiCo are learning, the activists are tenacious opponents, and, brand-wise, ones that can do serious damage to your health.
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