Monster Beverage (NASDAQ:MNST) announced disappointing third-quarter results last week. The company fell short of consensus revenue and earnings estimates -- a result that is indicative of the sluggish growth experienced by all energy drink brands, including those owned by Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP).

During the third quarter, Monster's revenue grew by 8.9% to $590 million -- $12 million short of analysts' expectations. Diluted earnings per share grew by 13.1% to $0.53, short of analysts' expectations for $0.57 per diluted share. The earnings per share figure was impaired by $0.03 as a result of legal expenses related to claims about the safety of the company's products.

Monster's image issue
The health and safety of Monster's products is a much bigger issue than the $0.03 per share earnings hit implies. Most of the company's recent struggles can be linked to negative publicity surrounding energy drinks. The company received a wave of negative press when the Food & Drug Administration announced it was investigating claims that Monster energy drinks played a role in five deaths dating back to 2004. Energy drink makers have been on the defensive ever since.

Monster CEO Rodney Sacks defended the safety of his company's products on the third-quarter conference call, saying, "the strongest evidence of product safety is that many millions of energy drinks continue to be safely consumed worldwide every day. By now, nearly 10 billion Monster Energy drinks have been sold and safely consumed around the world over the past 11 years."

Sacks has defended his products on every conference call since the FDA investigation began. However, the CEO's ability to defend energy drinks on a conference call is not nearly as important as the company's ability to lobby the U.S. Congress. The U.S. Senate Committee on Commerce, Science, and Transportation held a hearing in July to discuss possible restrictions on marketing energy drinks to adolescents. Monster and other energy drink companies are heavily involved in the rule-making process, which makes it likely that the outcome of the Senate scrutiny will be limited to advertising restrictions rather than age restrictions on purchases.This is the most favorable outcome energy drink producers could hope for.

Coca-Cola and PepsiCo are playing second fiddle
If Monster can get past the negative publicity and escape regulatory scrutiny with limited advertising restrictions, it has a bright future. The meteoric growth of the previous decade may not persist, but the company can sustain market leadership for years to come. Monster's closest competitor is Red Bull; the two are currently neck-and-neck in terms of market share. Rockstar, NOS, and AMP are far behind the two, suggesting that Monster and Red Bull will become the Coca-Cola and PepsiCo of the energy drink market when the dust finally settles.

Coca-Cola and PepsiCo's inability to gain a leading share of the energy drink market is not for lack of trying. Coca-Cola's most successful brands include Full Throttle and NOS, neither of which comes close to Monster in terms of market share. PepsiCo markets AMP and Kickstart -- both are promising brands but neither has made a serious run at Monster and Red Bull. The beverage giants' poor showing in the energy drink segment is likely due to their marketing tactics -- Red Bull and Monster already dominate the extreme sports arena, leaving Coca-Cola and PepsiCo to battle it out in less fanatical customer segments. As a result, neither Coca-Cola nor PepsiCo is likely to gain much traction except through acquisitions.

What to watch for
Prospective investors in Monster need to keep a close eye on legislation coming out of Congress. In the best scenario, the rules will only place restrictions on advertising while still allowing teenagers to purchase energy drinks. However, even if Monster draws up the rules to its advantage, it still must overcome the stigma of being linked to five deaths as well as the maturation of the domestic market. However, in a business that is as much about branding as it is about quality of product, Monster's lead in the energy drink market will likely lead to a duopoly with Red Bull -- a wonderful situation for any business.