Why Monster Beverage Stock Just Dropped Another 6.5%

MarketsMotley Fool

What happened

There's a monster under the bed, says Swiss stock analyst UBS. And its name is Monster Beverage (NASDAQ: MNST).

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Shares of the Monster Energy drinks purveyor got rocked with a 6.5% sell-off Thursday after UBS announced it was initiating coverage of Monster Beverage stock with a "sell" rating and a $48 price target.

So what

Monster Beverage stock cost more than $57 before UBS's report came out, so what the report basically amounted to was a prediction that Monster stock was likely to lose 16% of its value over the next 12 months. That was a frightening thought for shareholders, made more frightening still, perhaps, by the knowledge that UBS is ranked among the top 10% of analysts we track here at Motley Fool CAPS.

Why does UBS hate Monster so much? The analyst's "sell" rating cites overvaluation as a primary rationale -- Monster stock costs 32 times earnings right now, even after today's sell-off. That's a high price to pay given that most analysts agree the stock won't grow earnings any faster than 17% annually over the next five years. Worse, UBS says it thinks Monster will suffer a "meaningful" deceleration in growth sooner rather than later.

Now what

I don't know if I agree with that last bit. According to data from S&P Global Market Intelligence, Monster Beverage actually boasts pretty strong quality of earnings, with trailing free cash flow of $953 million almost precisely matching trailing reported net income of $955 million. That doesn't seem to foreshadow an earnings decline to me. That being said, even if Monster grows fully as fast as most of Wall Street is expecting it to, 32 times earnings is still an awful lot to pay for 17% growth.

For price-averse investors looking for a reason to cash out of Monster, UBS just gave them a fine excuse to do so.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage. The Motley Fool has a disclosure policy.