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.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments

Government Intervention
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.


SEE: 4 Government Interventions: Did They Work?

14-Year-Old Girl
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?

SEE: The Real Cost Of Drinking Coffee

Possible Ramifications
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.



SEE: The Importance of Diversification

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.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    The UAE: An Emerging Economy for Investors

    The learning from UAE on how it succeeded with timely diversification when the BRICS nations and the neighboring oil-rich economies faced challenges.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  9. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  10. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center