NY Initiates Energy Drink Probe

New York's attorney general has initiated a probe to determine whether leading energy drink makers have misled their consumers about the ingredients and nutritional value of energy drinks manufactured by them. The investigation requires information from three large companies -- PepsiCo Inc. ( PEP - Analyst Report ) , Monster Beverage Corp ( MNST - Snapshot Report ) and Living Essentials LLC. As investigation progresses, more companies may be asked to furnish additional information about their products.

The ingredients and nutritional value of the energy drinks, and their marketing by the concerned companies will be reviewed. The investigation will check the amount of caffeine and other artificial ingredients added to the drinks such as fruit flavors, vitamins B, taurine and ginseng. It may also be noted that the term "energy drink" is an ill-defined marketing term, which is not included under any FDA regulation.

The energy drinks industry, worth $8.9 billion, grew at a double-digit rate in fiscal 2011. The authority has been planning to impose restrictions on the sale of soda beverages and the present probe will be an addition to the move.

This investigation may impose further restrictions on beverage companies. As a result, the companies may not be able to capitalize on the increasing demand for energy drinks among young adults.

Given the rise in lifestyle diseases, more people are concerned about the nutritional value of packaged food. As a result, most of the companies are now focusing on increasing the health quotient of their food products. The stress is on producing food products with simple natural ingredients with minimum preservatives and optimum processing.

Net revenue of PepsiCo’s beverage segments, PepsiCo Americas Beverages, slipped 5% year over year (organically up 2%) to $5.35 billion in the second quarter of 2012. Any further regulation and restriction on beverages will act as significant headwinds for the segment.

We currently have a Neutral recommendation on both PepsiCo Inc. and Monster Beverage Corp. and both the stocks carry a Zacks #3 Rank (short-term Hold rating).