The Coca-Cola Company (KO), Monster Beverage Corp (MNST): Should You Get Out Now?

One quarter does not make or break a company. Any business, even one that ranks among the world’s best, can deliver a poor quarterly report for a variety of reasons. However, occasionally a company’s quarterly report will contain a troubling development that investors would be wise to not overlook.

That just might be what’s happening in the case of Monster Beverage Corp (NASDAQ:MNST), whose disappointing quarterly results missed analyst expectations and sent the stock down more than 5% on the day.

A rough quarter in review

Monster reported 7% sales growth and $484 million in total revenue, well below analyst expectations, which were pegged at more than a half billion in revenue. Over the past few years, Monster Beverage Corp (NASDAQ:MNST) had been able to realize sales growth in the double digits, so the top line result was surely a disappointment.

Also disappointing was the surprise decline in profits year over year. GAAP earnings clocked in at $0.37 per share for the first quarter, representing a 10% decline year over year.

Particularly alarming was the fact that legal expenses took between $0.01 and $0.02 per share off the company’s profit during the quarter. The Food and Drug Administration began an investigation into Monster Beverage Corp (NASDAQ:MNST) last year, after reports from consumers that linked Monster energy drinks to five deaths. Monster and its Chief Executive Officer have maintained the safety of the company’s products.

The twin giants of the beverage industry, The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP), while not under any current threat of litigation, are experiencing a similar problem. Volumes of their namesake sodas, which still account for large percentages of each company’s respective sales, are stagnating as consumers reach for healthier beverages.

In fact, at this point I would contend that the social stigma regarding the beverage offerings from all three companies represent the biggest, clearest threat to their businesses.

Beware the health-conscious consumer

I’ve written critically of The Coca-Cola Company (NYSE:KO) in the past for refusing to budge when it comes to its product offerings. Whereas Pepsi has embraced the consumer push for healthy food and drink alternatives, with products including its Baked Lays chips and Quaker oats, Coca-Cola has dug in its heels as a purely soda company.

To that end, Coca-Cola’s sparkling beverage division, which includes such brands as Coca-Cola and Sprite, account for roughly 75% of the company’s sales. On the other hand, PepsiCo, Inc. (NYSE:PEP)’s revenue is evenly split between food and beverages. In total, Pepsi has 22 brands that each bring in at least $1 billion in annual sales.

Monster Beverage Corp (NASDAQ:MNST) is entirely reliant on its energy drinks, and if the legal expenses continue to mount and the company’s products continue to receive scrutiny from consumers, bad things might be on the horizon.