Energy Drink Analyst Duel in Monster Beverage: Buy Versus Sell

Zacks Investment Research called Monster the dubious “Bear of the Day” and gave it a Strong Sell rating on its scale and a long-term Underperform rating. Zacks is concerned with the regulatory and legal smackdown now that the U.S. Food and Drug Administration and various attorneys general and lawyers are looking into the safety of the so-called energy drinks. Zacks pointed out the earnings erosion taking place, as well as the lower revisions for future expectations. Zacks even said, “While the global energy drinks market continues to grow, rising health risk concerns and resulting lawsuits will continue to affect the stock.”

And now for the positive call. Morgan Stanley initiated coverage on Tuesday with an Overweight rating, and it assigned a $65 share price target on the stock. This is where a duel really arises. Morgan Stanley believes that the pullback has created a compelling entry level, based on historic valuations and its underperformance against peers. The firm even expects that recent earnings misses will reverse in the second half of 2013, now that expectations and assumptions have been set much lower. Morgan Stanley even said its growth is not properly priced due to the concerns.

So far it is Morgan Stanley winning the duel for trader attention in Monster Beverage. Shares are up 3.5% at $55.71, against a 52-week range of $39.99 to $79.00. The consensus price target is $58.14 and the median target price is $59.00.

There are two things we also advise traders and would-be investors to consider in the case of Monster. The first is that Monster is still worth more than $9.2 billion and trades at more than 26 times the expected Thomson Reuters consensus earnings estimate for 2013. The second issue is that the short interest of 6.16 million is now the highest reading nominally, and in the 3.76 days to cover.