Is Monster Beverage Corp (MNST) A Monstrosity?

Starbucks indirectly competes with energy drinks with its coffee and tea products. What’s more is that the coffee company recently introduced a green coffee extract drink called ‘refreshers’, which has been compared to energy drinks. The coffee giant reported EPS of $0.57, with earnings growing 14% year-over-year, in line with management expectations. Challenges for Starbucks include a European slowdown and consumer preferences internationally. I think coffee and energy drinks are different markets, and I am also skeptical on its refresher drink, which has received mixed reviews.

Reasons to love energy drinks. What makes the energy drink market relatively unique is its high margin-high priced business, where by volume energy drinks make up only 3.3% of the carbonated beverages industry, but in dollars it accounts for 11.8% of the market—according to Beverage Digest. The fact that Monster’s business is indeed higher margin makes it a compelling investment opportunity with high returns on capital above other major publicly traded companies:

• Monster 33%
• Pepsi 11%
• Coca-Cola 13%
• Starbucks 25%
• Dr. Pepper 11%

• Monster 33%
• Pepsi 28%
• Coca-Cola 27%
• Starbucks 27%
• Dr. Pepper 27%

Putting Monster another step above major competitors is its ‘healthy’ balance sheet, carrying no debt and having $590 million in cash. Check out Monster’s debt to equity ratio of…

• Monster 0%
• Pepsi 127%
• Coca-Cola 99%
• Starbucks 11%
• Dr. Pepper 120%

From both a profitability and solvency standpoint, Monster appears to be in good shape. But digging a bit deeper, Monster also offers investors the best priced growth, as measured by its price to earnings to growth ratio:

• Monster 1.5
• Pepsi 4.8
• Coca-Cola 2.3
• Starbucks 1.6
• Dr. Pepper 2.1

Don’t be fooled. Not only am I interested in the company, but so are a number of other investors. This includes the fact that a number of insiders are heavily invested in the company, with the top officers, CEO and CFO, owning almost 20% of the company. As well, there are a number of billionaire hedge funds invested in the stock (see all hedge funds owning Monster). These include Janus Capital (3.67MM shares), Renaissance Technologies (1.9MM shares) and Citadel Advisors (1.45MM shares), who collectively own over 4% of the company (check out Simons top picks).

Although Starbucks is a close second on a number of the metrics above, and while I believe the company is a strong buy (read more here), I believe Starbucks presence will remain in the coffee market and that Monster is the best play on the energy drinks market. There is still speculation that remains around Monster’s regulation issues, but the stock could well be a solid investment opportunity in a rapidly growing industry.

The article Is Monster A Monstrosity? originally appeared on Fool.com and is written by Marshall Hargrave.

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