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Investment Opportunities

In a $6.2 Billion Market, Investors Are Bubbly Over Coke and Monster Deal

Talk about a caffeine rush.

Last week, The Coca-Cola Co. (NYSE: KO) announced it would pay $2.15 billion for a 17% stake in Monster Beverage Corp. (Nasdaq: MNST). According to the agreement, the companies will exchange brands that allow them to refocus on the specialized beverage types they are best at making.

For example, Monster will acquire brands of its forte, including Coke’s Full Throttle, Burn and NOS energy drink brands. Meanwhile, Coke will take on Monster’s successful non-carbonated brands, including Peace Tea, Hansen’s Juice Products and others.

The announcement kicked off a 21% jump in Monster stock, as well as a 1% jump in Coke stock, as investors realized the deal’s potential.

“We believe it is a win-win deal for both the companies,” Zacks.com analysts said in a memo that followed the announcement. “Gaining a share of the energy market seems a wise decision by Coca-Cola considering that the energy drinks category is doing better than other beverages.”

Will investors continue to get onboard? Should you?

Here’s what you need to know about Coke’s quasi-merger with Monster, and what it means for the world’s largest soft drink producer.

Fighting for Taste Buds

Coke may be the world’s largest soft drink producer, but consumer tastes are changing. Like a bottle of Coke with the cap left off, the carbonated soft drink market has fallen flat. Last year, global production fell by 2%, while carbonated energy drink sales shot up by 7%.

According to Nielsen research, soft drink sales rose by almost 1% in mid-August. However, Coke is looking to diversify into markets with a less shaky future. For example, liquid tea sales rose by 4.9% within the same period.

Meanwhile, energy drink sales rose by 12%. The category has become more attractive to Coke over time, especially since carbonated soft drinks account for about 70% of Coke’s sale volume.

When it comes to crafting energy brews, only one company, Red Bull GmbH, has been more successful at canning energy than Monster. The private company remains the top contender with a 42.9% market share. Monster, in contrast, maintains a 35.1% market share in the $9 billion market for U.S. energy drinks.

So, why choose Monster over other energy drink makers? The answer is simple: It’s in cahoots with Coke.

Analysts had long predicted a partnership between the two companies, as Monster has already done so to take advantage of Coke’s deep supply channels. Before the announcement, Coke had already distributed Monster products to about half of the nation’s retailers.

A Monster Opportunity

Although the plan bodes well for Coca-Cola, the true winner in the partnership is Monster. Although the company has a solid market share in the U.S., it only commands about 14% in global energy drink sales.

By way of the purchase, Monster now has greater access to Coca-Cola’s worldwide distribution network.

That’s no secret to investors, who have seen Monster shares shoot to 52-week high of $93 in mid-August from $64 in July. Seek out a stake in Monster stock or go after one of its underrated competitors, specifically, PepsiCo Inc. (NYSE: PEP).

PepsiCo has also expanded into the market with its own successful line of “Amp” energy drinks. What’s more, PepsiCo has experienced year-to-date gains in excess of 12%. And that’s something to get energized about.

 


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