Monster Beverage (Nasdaq:MNST) saw its stock drop 14% October 22 on news that as many as five people are linked to deaths related to drinking its 24-ounce caffeine-induced energy drinks. In the past, governments at both the state and federal level have waded into this very controversial subject matter. Up until now, Monster and the rest of the players in the energy drink industry have been able to skate past government legislation that banned or seriously restricted their sale. This latest episode might be the beginning of the end for the energy drink industry. I'll look at what's at stake for Monster and its peers.
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Google the words "energy drinks government" and you get a litany of examples of state, federal and even foreign governments looking to clamp down, or at the very least, provide consumers with better information about the ingredients and the potential health issues that exist with these drinks. And it's not just limited to Monster. In August, Michael Gormley of the Associated Press reported that New York State Attorney General Eric Schneiderman had subpoenaed Monster, Pepsico (NYSE:PEP), maker of the AMP brand of energy drinks, and Living Essentials LLC, maker of the 5-Hour Energy Shot.
The Attorney General is examining both how the products are made and equally important, how they're marketed. Michael Jacobson, executive director of the Center for Science in the Public Interest, is quoted in Gormley's article: "This has been a slimy sector of the beverage industry almost since the beginning..." Those aren't exactly words of endorsement. However, can you blame the energy drink opponents? The amount of caffeine in soda is limited by the FDA, but energy drinks are not.
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The death of Anais Fournier isn't something that happened today or yesterday but rather December 23 of last year. As far back as April, Senator Dick Durbin requested in a letter to the FDA that it enforce the same caffeine restrictions on energy drinks that are currently imposed on soda. Durbin further asked for a clarification of the difference between a drink and a supplement.
The FDA currently views energy drinks as similar to coffee in terms of caffeine content. Fournier drank two 24-ounce cans of Monster's energy drink within a 24-hour period. The Maryland teenager died from what the wrongful death complaint described as "heart arrhythmia due to caffeine toxicity complicating mitral valve regurgitation in the setting of Ehlers-Danlos syndrome." Essentially, the jolt of caffeine to a troubled heart can affect its ability to pump blood. In Fournier's situation, she lost complete consciousness, was put into a medically-induced coma, and died six days later. However, a single venti-size cup of coffee at Starbucks (Nasdaq:SBUX) has more caffeine than one of the two 24-ounce cans that Fournier consumed. So who's right?
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Although it's way too early to predict how the Fournier case or any of the other reported deaths will affect the energy drink industry, possible outcomes might include:
- The FDA banning the sale of energy drinks to people under the age of 18, similar to existing cigarette laws. Unless the FDA can reasonably prove that the caffeine content in these drinks is 100% safe, it could be the course of action sought by governments.
- More likely, they would place energy drinks under the same restrictions as soda. This means no more than approximately 5.9 milligrams of caffeine per ounce. Under these conditions, Monster would have to reduce its 24-ounce can from 240 milligrams of caffeine to 142 milligrams or 41% less.
- Like cigarette packaging, the federal government in conjunction with the states, would introduce laws that require all energy drink makers to clearly print the milligrams of caffeine in a given serving along with the risks to those with heart conditions.
- The FDA could outright ban the sale of energy "shots," which have significantly higher caffeine content by volume than the regular energy drinks.
Effect on Stock
I don't think there's any question that a verdict for the plaintiff in this case would wreak havoc not just on Monster's stock, but also on Pepsi, Coca-Cola (NYSE:KO) and even Dr. Pepper Snapple Group (NYSE:DPS). Clearly, Monster has the most to lose amongst its peers because its energy drinks accounted for 94.4% of its 2011 revenue of $1.7 billion. If the FDA went the soda route and imposed a similar limit on energy drinks, the effect on sales because of a 41% reduction in caffeine is impossible to predict. Do we know for certain that teenagers are consuming energy drinks only for the caffeine rush and not for other reasons, such as the taste?
Twenty years ago, I'd be fairly certain that kids were after the caffeine high. Today, with Americans consuming huge amounts of coffee, it's less obvious why teens are drinking these products. Marketing surely has a lot to do with it, but beyond that, I'm not sure there's a smoking gun here. It's tragic what happened to Anais Fournier, but she may have suffered the same fate simply by drinking a large coffee.
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The Bottom Line
So, what's a shareholder to do? If you've made money on your investment, the uncertainty hanging over its stock puts a ceiling on any future gains you can expect. Furthermore, many people, including myself, believed Coke would eventually buy Monster, for whom they currently distribute its product. That's definitely on hold. If you've got profits, take them and wait for the dust to settle. After all, you can always buy back later. If you don't own its stock, I can't see a reason to buy at this point. It's dead money or worse for the next 12 to 18 months.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.