• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Takeaway: Monster is changing how it classifies one of its products. That doesn't change our opinion on the stock.

Monster Beverage Corp (MNST) announced Wednesday they will market their caffeine-laced product as a “beverage,” not as a “dietary supplement.”  This does nothing to alter our bearish take on the company.  Additionally, our estimates for first-half earnings remain below Street consensus.   

Dietary supplements are regulated by the FDA.  But so are foods? you ask, and you are right.  Because of the way the FDA categories are drawn, makers of energy drinks have flexibility to define their products as either “supplement” or “food.”  One perceived benefit of being a Food is that makers of Supplements are required to report adverse consequences of product use to the Agency.  Such notification is purely voluntary for makers of Foods.

Health Concerns

 

But MNST can’t get itself out of the crosshairs just by changing category.  The national Drug Abuse Warning Network (DAWN) gathers hospital statistics on adverse reactions to substances, regardless of FDA classification.  DAWN statistics around caffeine-based products – not to mention lawsuits against the manufacturers – present an ongoing image problem for MNST.  The decision to become a Food doesn’t address this.

What Can MNST Do?

 

We would like to see MNST get out in front of regulatory developments by taking two steps: disclosing caffeine content, and staying away from advertising that is targeted at consumers under 18 years old.  We believe both of these are likely to be mandated soon, and voluntary action now could give MNST a leading voice in the debate surrounding this segment.

Conclusion

 

We don’t like MNST any better than before this announcement, and we’re not convinced this move raises their profile.  If the company follows up by putting itself at the head of the debate, they will have accomplished something concrete – though perhaps still not enough for us to turn bullish, given our dim view of near-term earnings.