As Coke Shakes Up Energy Drink Category, Monster Earns A Downgrade

Monster Beverage Corp MNST fizzled Thursday despite posting significant top- and bottom-line third-quarter beats. One analyst, acknowledging new risk in galvanized competition, backs the investors turning bearish on the Red Bull rival.

The Rating

Morgan Stanley analyst Dara Mohsenian downgraded Monster to Equal-Weight and cut his price target from $69 to $57.

The Thesis

Monster’s earnings were undermined by news of potential energy-drink competition from Coca-Cola Co KO.

The established brand is resisting Coke’s foray into the category, which it said violates an agreement prohibiting Coke from competing in energy drinks with products “likely to be confused with” Monster’s. However, Coke expects to be able to market under the Coca-Cola brand and leave Monster relatively untouched.

“After speaking with Coke, the company hopes the product will be more incremental to the category than cannibalistic to MNST,” Mohsenian wrote in a note. It delayed beta launch until April as it awaits arbitration.

The analyst considers the product a competitive threat compounding that of emerging rivals like Bang and ultimately limiting Monster’s strategic potential. Monster’s opposition to Coke’s launch, though, could prove equally painful.

“Monster distributes through the Coke distribution system globally in almost all markets,” he wrote. “Thus, any problems in the Coke relationship could impact results.”

Mohsenian expects Coke to roll out its line but noted that an arbitration loss is possible.

Price Action

At time of publication, Monster shares were down 6.6 percent to $52.21.

Related Links:

How Aluminum Prices Impact Monster Beverage's Gross Margins

Monster Beverage Is A 'Compelling Growth Story,' Deutsche Bank Says In Upgrade