This note was originally published September 17, 2013 at 16:43 in Consumer Staples

Last week we held an expert conference call titled, "Are Energy Drinks Harmful?" with Dr. Deborah Kennedy, a pediatric nutrition and expert on energy drinks.


Below are our main conclusions regarding regulatory concerns and evolution of the space based on Dr. Kennedy’s presentation and our own work. We also size up Monster Beverage Corp (MNST), which we’re bearish on from a quantitative perspective; however we remain bullish on the outperformance of energy drinks over the beverage category.




Key Considerations for the Industry

The FDA has left the door open for the amount of caffeine that energy drink (ED) manufacturers may put in their products. We do not see this stance changing over the near to intermediate term.



  1. The effects of caffeine are difficult to measure and are subjective to the consumer based on such factors as age, sex, weight, and existing medical conditions.
  2. There is no accepted standard for measuring caffeine.
  3. The FDA does not wish to open a pandora’s box until there’s more scientific evidence on caffeine: if energy drinks caffeine levels are regulated, what’s next, coffee? This is a can of worms that we do not believe will be addressed by the FDA over the intermediate term.


Longer Term Risks

  • Over the longer-term, keep in mind that the FDA has put a limit on the amount of caffeine in soda drinks, 71mg. A similar limit could be placed on energy drinks over time. However, we expect the FDA to assess increased scientific studies on caffeine and energy drinks but ultimately be slow to act to issue a similar limit to soda drinks for energy drinks.
  •  As Dr. Kennedy suggested, we think there’s a higher probability that energy drinks are banned for sale to kids under 12 years of age.
  • A ban on the marketing of energy drinks targeted at kids.
  • We do not expect energy drinks to be move behind the counter.


MNST – Bearish Stock, Bullish Category

MNST is a stock that currently is set-up bearish across our quantitative intermediate term TREND price level of $57.56 (dancing below the level, up 3.5% since last Friday). 




We continue to believe that energy drinks will maintain their outperformance over the beverage market. That said, MNST fundamentals have significantly eroded over the past 5 quarters. Below we show MNST’s top and bottom line Bloomberg consensus estimates for reference.  We believe this slide in performance is attributable to both weak overall beverage trends, including poor weather conditions across recent quarterly results, and litigation concerns. On the last point, we think that the existing litigation is now largely behind the company, as are the associated media headlines, which should buoy sentiment. Our call with energy drink expert Dr. Kennedy only furthered our opinion that despite health concerns related to energy drinks, the FDA is not in a position to act over the near to intermediate term on caffeine content for the reasons we highlighted above.   Finally on a comp basis, you’ll notice much more favorable comparisons over the next four quarters, which could prove a tailwind.  We’ll be watching our quantitative levels to see if MNST can overcome its bearish intermediate term set-up before we consider it on the long side.


ENERGY DRINKS: RISK AHEAD? - z. mnst sales




-Matt Hedrick


In preparation for CCL FQ3 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "Fleet-wide bookings during the last 11 weeks from the end of March covering the next three quarters are running higher year-over-year at higher prices."
    • "North American brands' bookings and pricing during this 11-week period are higher."
      • "Caribbean itinerary booking volumes in the last 11 weeks covering the next three quarters, are slightly lower year-over-year at slightly higher prices."
      • "Alaska bookings, again excluding Carnival, are significantly higher at lower prices."
      • "European itinerary bookings for North America brands, are slightly lower at nicely higher prices."
    • "EAA brands' bookings and pricing are also higher versus the prior year."
      • "European itinerary booking volumes, and that's approximately 50% of EAA capacity, are significantly higher at higher prices."
      • "Caribbean itinerary volumes for EAA brands, which are just under 10% of EAA capacity, are running behind last year, but also at nicely higher prices."


  • "Bookings and pricing over the last 11 weeks are both lower year-over-year in a high single-digits low double-digits range respectively." 
  • "On recent surveys, consumer perception of the brand has significantly improved since the incidents back in March, and we expect this trend to continue as confidence builds back in the brand. We will need to cycle through a full year before we begin to see positive pricing comparisons, which should begin in the second half of 2014."


  • "(Ex Carnival) On a fleet-wide basis at the present time, occupancies are slightly behind last year at slightly lower prices."
    • "(Ex Carnival) North American brand occupancies are slightly behind at flattish pricing, Alaska pricing is behind last year and North American brand, the European itinerary pricing, is higher versus last year."
      • "Carnival Cruise Lines' pricing is lower on all of its major itineraries versus last year."
    • "EAA brand occupancies for the third quarter, which are largely in Europe trades, are slightly behind last year at lower pricing.
      • "Occupancies for our Asian and Australian business are nicely higher year-over-year with slightly higher pricing. The performance of Costa in China is particularly encouraging given the doubling of its capacity in Asia during the quarter."


  • "On a fleet-wide basis, excluding Carnival, cumulative occupancies are slightly lower at slightly lower pricing."
    • "For North American brands, excluding Carnival again, occupancies are lower at higher prices."
      • "Carnival Cruise Lines' occupancies for the fourth quarter are also lower at slightly higher prices."
    • "For EAA brands, occupancies are flattish year-over-year at lower prices."
      • "Costa brand occupancies for the fourth quarter are nicely higher at lower prices...This is the first time during the last several quarters that Costa has been ahead of the closer-in booking curve this early in the booking process. We read this as a very positive sign are expecting Costa to have a nice increase in revenue yields in the fourth quarter."

1Q 2014 TRENDS

  • "On a fleet-wide basis, and this includes Carnival, occupancies are lower year-over-year at higher prices. North American brands' occupancies, again including Carnival, are lower year-over-year at nicely higher prices. EAA brands' occupancies are also lower at slightly higher prices."


  • "A major challenge in Europe right now is the weakened economies, especially in Italy and Spain."
  • "Northern Europe product did have a significant capacity increase this year relative to the Med, and we do not expect that to recur in 2014."


  • "So beginning in the second half of the year, we are planning to increase marketing spend across all North American brands and expect this to continue into 2014."
  • "We had talked about the vessel enhancements being a multiple year process. So there will be some of that in 2014 as well."


  • "There are some incremental operating expenses relating to the scrubbers, but there really isn't anything significant in the way of fuel consumption changes." 


  • "Even though our Northern European brands the yields are going down, the yields in P&O Cruises and AIDA are still some of the highest in our fleet. They're performing incredibly well."


We are publishing our SSS Monitor in order to provide a clear picture of same-store sales trends within the restaurant industry. Grouping chains by concept allows us to effectively measure a chain’s performance against its more immediate peers. Same-store sales are color coded green, if above, or red, if below, the sub-sectors mean.  2-year averages are color coded green, if accelerating, or red, if decelerating, on a sequential basis.


Overall, Fine Dining and Quick-Service same-store sales trends have been strong, while Casual Dining and Family Dining same-store sales trends remain anemic.  The tables below highlight these trends and provide consensus same-store sales estimates for the current fiscal quarter. 



Notable Trends

  • Casual Dining chains seeing accelerating trends: Applebee’s, Bonefish, Carraba’s, Cheesecake Factory, Chili’s, LongHorn, Maggiano’s, Outback, and Red Robin.
  • Casual Dining chains seeing decelerating trends: BJ’s, Buffalo Wild Wings, Olive Garden, Red Lobster, Ruby Tuesday, and Texas Roadhouse.
  • Fine Dining concepts continue to see strong mid-single digit SSS, but have begun to decelerate on a 2-year basis.
  • Family Dining concepts continue to see very low-single digit SSS, but are accelerating on a 2-year basis.
  • Fast Casual concepts are seeing SSS growth decelerate marginally, while remaining relatively flat on a 2-year basis.
  • In the Quick-Service segment – Chicken, Coffee/Snack, Mexican and Pizza concepts continue to see strong SSS growth while old line sandwich concepts continue to be the group laggard, with SSS remaining in the low-single digit range.  Burger King and McDonald's are lagging Wendy's and SONC, which are showing real menu innovation to drive incremental traffic.   









Howard Penney

Managing Director



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Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on our radar screen.

Keith McCullough – CEO

Merkel romps to victory (via Reuters)

China Manufacturing Gauge Increases to Six-Month High (via Bloomberg)

Fed's Lockhart says U.S. losing some economic mojo (via Marketwatch)

Brawl, Goalie Fight Mar Leafs-Sabres Game (via ESPN)  


Morning Reads on Our Radar Screen - earth1


Darius Dale – Macro

The Sad Reality of Z.I.R.P. (via Twitter)


Josh Steiner – Financials

Signs of an easing of credit requirements are surfacing (via LA Times)

Metro Phoenix housing market's turnaround creates new issues (via


Matt Hedrick – Macro

At 77 He Prepares Burgers Earning in Week His Former Hourly Wage (via Bloomberg)

Merkel Seen Neglecting German Needs With Focus on Euro (via Bloomberg)


Howard Penney – Restaurants

Frothy Stocks Yield More IPOs (via Restaurant Finance Monitor)


Tom Tobin – Healthcare

Uncovered kids still a major problem (via


Jonathan Casteleyn – Financials

BlackRock Sees Growth Surprise as Bond Risk Slides: China Credit (via Bloomberg)

Around the Globe

Client Talking Points


Good news out of China this weekend. September's HSBC flash purchasing managers index came in at a better than expected and expansionary 51.2.  This was also a sequential improvement from August of 50.1 and the highest reading since March. Shanghai Composite up over 1.3% this morning leading most of the major Asian indices. The set up for China gets increasingly interesting if the HSBC survey is correct and Chinese GDP is set to accelerate sequentially and exceed current consensus estimates.  


Economic data out of Europe this morning is largely positive.   While the Eurozone flash manufacturing PMI edged down to 51.1 in September from 51.4 in August, both the Services and Composite PMI hit 27-month highs.  This is just one data series, but the potential for a sustained European recovery is a theme that you will likely see Hedgeye highlighting more often heading into year-end. Meanwhile, a great day for Angela Merkel. German voters gave her a third four-year term and a better-than-expected showing for her Christian Democrat party, possibly leading to an absolute majority in Parliament. Our immediate-term Macro Risk Range for the DAX is 8563-8741.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


The Euro is the beneficiary of Bernanke devaluing America's Purchasing Power - EUR/USD +1.7% last wk to +2.5% YTD



"We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though." -Ben Bernanke, July 2005


The S&P 500 has risen more than 150 percent since March 2009.

European Banking Monitor: To QE, Or Not To QE, That Is The Question

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - Europe's banking system also likes QE, apparently. Of the 32 institutions we track, all but two tightened week-over-week.  Spain, Italy, Portugal and Russia all saw their bank swaps tighten significantly. 


European Banking Monitor: To QE, Or Not To QE, That Is The Question - zz.banks


Sovereign CDS – Sovereign swaps mostly tightened last week in response to the Fed's decision. Portuguese sovereign swaps tightened by -6.1% (-34 bps to 523 bps) and French sovereign swaps widened by 1.6% (1 bps to 68 bps).


European Banking Monitor: To QE, Or Not To QE, That Is The Question - zz. sov1


European Banking Monitor: To QE, Or Not To QE, That Is The Question - zz.sov2


European Banking Monitor: To QE, Or Not To QE, That Is The Question - zz.sov3png


Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: To QE, Or Not To QE, That Is The Question - zz. euribor

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