Electronic Cigarettes: An Ironic Source of Growth For Big Tobacco?

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

E-cigarettes are becoming more mainstream. The e-cigarette is being touted as a healthier (although that's still up for debate) alternative to traditional cigarettes, because they contain no actual tobacco and the smoker inhales nicotine-infused water vapor instead of smoke. Smoking e-cigarettes, as opposed to tobacco-wrapped cigarettes, can also cut the cost of the habit significantly. It is also claimed that the product contains less toxins than the traditional cig.

The Incentives of Electronic Cigarettes:

Higher margins and a superior image compared to traditional cigarettes will help generate growing profits for the electronic cigarette market. Currently the electronic cigarette can also be smoked in public places where regular cigarettes can't, and the reduced cost of switching from traditional cigarettes is also appealing to consumers. The e-cig's biggest market is in the United States, but also enjoys popularity in the U.K., too. According to Dr. Alastair Johnstone, M.D., of Super Cig (the U.K.'s leading e-cig supplier):

“Essentially, switching from a traditional cigarette to an e cigarette is beneficial for three main reasons. The first is that none of the more than 2,000 chemicals that are present in a tobacco cigarettes are found in electronic cigarettes. The second is that an e cigarette from Super Cig is around 75% cheaper than smoking traditional tobacco products. The third is that electronic cigarettes can be enjoyed in bars, restaurants and in many places where traditional cigarettes have been banned. So when you combine health, finances and convenience, it’s easy to see why our company is growing– and will continue to expand in the coming months and years.”

The Major Tobacco Players:

Electronic cigarettes have now become a $2 billion industry. The tobacco-less e-cigarette could be a much needed source of growth for the cigarette industry- an ironic twist considering that these companies made it big selling tobacco. Lorillard (NYSE: LO) has entered the e-cig market with their Blu line (purchased in April for $135 million). Reynolds American (NYSE: RAI) has also joined in with their own products. Both companies are betting on the electronic cigarette for future growth. The number of e-cig users is expected to quadruple by 2014.

Bonnie Herzog, Wells Fargo security analyst, stated that, "We think e-cigs are to tobacco what energy drinks are to beverages." She also added, "We expect Reynolds to be the next mover into this growing category, most likely organically but we wouldn't rule out a potential acquisition... However, with Altria, the race is on: who's next in e-cigs." Shortly after, Reynolds began marketing its Vuse line of e-cigarettes.

Altria (NYSE: MO) was once in the hunt to purchase Blu e-cigs, but lost out to Lorillard. Philip Morris (NYSE: PM) has shown some interest in getting into the e-cig market, but doesn't seem to be in a hurry- instead deciding to gravitate towards creating more innovative smokeless tobacco products that will replace traditional smoke or vapor-producing tobacco products altogether. Both companies seem to be off to a slow start in offering e-cigs to traditional smokers.

Lorillard (the third largest tobacco company) seems to be in the lead, with it's Blu e-cigarette as one of the top emerging brands in the market. The company pulled in $8 million last year as a result of their Blu e-cig products, which may not sound like much for such a huge company, but its a start.

Conclusion: 

At the end of the third quarter, Lorillard revealed that they had begun the roll-out and new advertising campaign of Blu eCigs. Continued investment in advertising should increase awareness and help generate increasing sales. Lorillard's CEO commented on the situation, stating:

"...the Company will ramp up investment behind Blu eCigs as it further penetrates national retail distribution.  The Company expects to continue to deliver a double digit total shareholder return, as measured by EPS and the dividend yield, while it makes these strategic investments."

 

As can be seen above, the company is priced fairly in respect to its earnings, and like many other tobacco companies, sports an inflation-beating dividend yield. The company has also recently announced a three-for-one stock split, in the form of a 200% stock dividend. I see Lorillard as the best option as of now to play the e-cig market and its potential growth prospects.


Jharry1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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