Up until six months ago, Monster Beverage Corp (NASDAQ:MNST) was a capital gains machine.  The stock climbed from about $20 in 2010 to around $71 in June 2012, following a 2:1 split.  It’s been downhill from there.  Shares currently trade about 40% off of their 52 week highs.  Net sales increased in 2011 by 30%, but likely by only 21% in 2012.  Like all growing companies in a competitive market, Monster faces challenges and opportunities that will impact its future business.

What’s going right?

Monster has been a rapidly growing presence in the energy drink market.  That trend will likely continue, albeit at a slower pace.  Further, Monster isn’t a one trick pony performing in one geographic market.  The company develops and markets a variety of beverage products including fruit drinks, teas, and all natural organic sodas in addition to its energy drinks.  More new products will roll out in 2013.  While the US is its home market, Monster expanded into Asia and Central America during 2012.  According to the company’s 3Q 2012 report, international sales account for 23% of revenue. Further planned international expansion should increase revenues.  None of this growth is by accident.  The company’s marketing staff knows what it’s doing and employs a variety of promotional strategies to distinguish Monster from its competitors in the non-alcoholic drink market.

Further enhancing investor appeal is a recently announced stock buy-back program.  Best of all, in my opinion, Monster has no long term debt to speak of.  This allows flexibility to develop new products, enter new markets and, theoretically, finance acquisitions or other ventures on favorable terms.  And speaking of acquisitions, Monster could, just maybe, be a take-over target itself.

What could go wrong?

In some respects the question should be, “What went wrong?”  In a nutshell, five deaths have been linked to Monster or other energy drinks.  One family has sued Monster, claiming their 14 year old daughter collapsed and later died after drinking two 24 oz Monster Energy drinks in two days.  The FDA has launched an investigation and one unnamed state attorney general is also investigating.  As a doctor, I understand the difference between “association” and “causation.”  Unfortunately, the general public may not make this distinction and, in the midst of a media frenzy, may leap to the conclusion that energy drinks can kill people.  If nothing else, the FDA may issue new regulations regarding the caffeine and other stimulant content of soft drinks. One potential landmine is public perception of Monster during these investigations.  The company obviously won’t admit to being responsible for these deaths, but if it does so too aggressively, it risks a public relations black eye.

Other risks to Monster’s future profitability is the challenge of sustaining its past growth rates.  Monster is a maturing company in a highly competitive market.  Competitors are numerous, and the likes of Red Bull, PepsiCo, Inc. (NYSE:PEP) or The Coca-Cola Company (NYSE:KO) will not ignore Monster’s past success in the  “alternative beverage” market.  Starbucks Corporation (NASDAQ:SBUX) enjoys significant market share in the caffeine drink world and since 2009 has worked to maintain customer loyalty.  Coke, Pepsi and Starbucks all enjoy a substantial international presence and Monster will have to fight to carve out its own niche in Asia and Central America.  While expansion into foreign markets will be a positive, currency exchange rates may erode earnings.

Will Monster be a take-over target?

While Red Bull might compete head to head with Monster, Pepsi or Coke might just buy out Monster instead.  Pepsi, for example, bought a majority interest in Russia’s Wimm-Bill-Dann in 2012.  Coke bought multiple companies over the past five years.  Joining Monster’s brand appeal and market share with the distribution network of either Coke or Pepsi might be a proposition too good for the big guys to pass up.

Final Foolish Thoughts

Monster Beverage Corp (NASDAQ:MNST) has been on a tear since the summer of 2009.  Since June, 2012 though, the stock has slid 40% from its 52 week high.  The combination of being a maturing company, increasing competition, and scrutiny of energy drinks by the FDA and others has taken its toll.  My hunch is that Monster will not be held liable for the deaths associated with their energy drinks, but the FDA will more closely regulate the industry.  Monster will likely continue growing, just not as rapidly as in the past.  Once the cloud of FDA review and other investigations passes, the various strengths of the company should assert themselves.  Prospective investors should adjust their expectations accordingly.

The article Monster Growth or Major Disappointment? originally appeared on Fool.com.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.