3 Companies You Won't Want to Miss
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
According to Wells Fargo, the e-cigarette market in the U.S. will be $1 billion this year, and it will increase to $10 billion by 2017. This trend will be beneficial for the cigarette manufacturing companies, as these companies are facing headwinds from high tax rates, increasingly strict government rules and declining sales of traditional cigarettes. Tobacco companies are diverting their focus to e-cigarettes and increasing their marketing budgets for these products. Here are three tobacco companies that dominate the tobacco industry in the U.S. and are increasing their focus on e-cigarettes.
Growth in smokeless tobacco segment
Altria (NYSE: MO), the largest cigarette-producing company in the U.S., is increasing its focus on e-cigarettes. The overall U.S. tobacco industry is facing headwinds in a market where smokers are quitting regularly due to growing health concerns. It is estimated that the number of traditional cigarette smokers in the U.S. decreased to 56 million in 2012, down from 60 million in 2008. According to the Centers for Disease Control and Prevention, 45 million smokers in the U.S. try to quit smoking every year.
Altria has attempted to take advantage of this trend by launching “MarkTen” e-cigarettes. The company is using “Four draw” technology in the production of MarkTen, which will give a similar smoking experience to traditional cigarettes. Moreover, this product will be disposable, but can be reused by purchasing a separate charging kit. Altria's e-cigarette will be manufactured in China, and the estimated price per e-cigarette is $9.5. The company's market share in traditional cigarettes increased to 56% in the quarter ending in March 2013. With its strong brand affiliation, it will be able to target its e-cig to traditional cigarette smokers who want to make the switch to e-cigarettes.
Smokeless tobacco contributes around 20% of Altria's total revenue. It is expected to grow by 3% annually in the next two years. Moreover, the company dominates the U.S. smokeless tobacco market with around 55% market share. Altria has brands like Copenhagen, Skoal and Red Seal in its smokeless tobacco portfolio. It is estimated that revenue per pack will increase from $2.22 in this year to $2.24 next year and $2.28 in 2015.
Consumption of smokeless tobacco is considered less risky than cigarettes, although scientific evidence doesn't fully bear this out. The total market size of smokeless tobacco in the U.S. will also see an upside during the same period, from $1.45 billion in this year to $1.59 billion in 2015. Taking advantage of these factors, the total earnings of the company are estimated to increase from $7.2 billion in the previous year to $7.7 billion in 2015.
New product launch
To capture the emerging e-cigarette trend, Reynolds American (NYSE: RAI) launched its Vuse brand. Launched in Colorado, the U.S. version of the Vuse e-cigarette will be available with a single rechargeable unit called Vuse Solo, to recharge the battery for reuse. The initial price for Vuse will be $10 per stick, which is in line with industry peers. Moreover, its other product, Vuse System, will be introduced with additional features, including three flavor cartridges, a recharge battery, and carrying case. There are around 2.5 million smokers of e-cigarettes in the U.S., and that number is estimated to increase by four times in the next year. According to a study, one out of five cigarette smokers said that they have tried e-cigarettes once. With the help of its new products, the company will be able to tap this growing market.
Reynolds American's net income increased by 88% in the first quarter of 2013, due to higher prices and lower expenses in comparison to the previous quarter. Moreover, its earnings increased to $508 million from $270 million, year over year. Market share of its flagship brands, Camel and Pall Mall, also increased to 8.5% and 9%, respectively. The increase for Pall Mall was largely driven by smokers looking for affordable cigarettes. Reynolds American promotes this cigarette as long lasting and affordable. Moreover, Reynolds American increased the prices of its cigarettes recently by $0.06 in June 2013, coming into effect on June 6. This increase will further result in increased profitability for the company in the upcoming years.
The company announced a $2.5 billion share-buyback program in 2011, in which Reynolds American spent $300 million to buy 6.8 million shares during the last quarter. Looking at the growth of the company, it is expected to continue its share buyback program, as there is still $900 million worth of share buyback remaining.
Banking on e-cigarettes
Lorillard (NYSE: LO) acquired Blu eCigs last year for $135 million. In the first quarter of 2013, the total sales of Blu was $57 million, up by 46%, quarter over quarter. E-cigarettes contribute around 3.61% share in the total sales of the company. The company expanded in more than 50,000 stores for the sales of e-cigarettes since the acquisition of Blu eCigs. To get a competitive advantage, the company is also focusing on brand building by associating itself with motorsports teams and music concerts. This will confer long-term benefits on the company. Looking at the growth of the e-cigarettes market in the U.S., it is expected that e-cigarette sales will reach to around $83 million in the second quarter.
Some 90% of cigarettes produced by Lorillard contain menthol, and there are concerns with FDA policies regarding menthol use in cigarettes. The Tobacco Products Scientific Advisory Committee, appointed by the FDA, suggested the use of menthol did not increase the individual risk of smoking-related problems. However, in June 2013, the FDA permitted Lorillard to sell two cigarette brands, “Newport Non-Menthol Gold Box 100s” and “Newport Non-Menthol Gold Box”. Lorillard is the only tobacco company to receive product clearance from the FDA, out of 500 requests. The company will benefit from this move, and it is estimated that overall earnings of the company will increase by 10.57% over last year.
Altria will get the benefits of its new product MarkTen while increasing market size, and the rising price of smokeless tobacco will boost revenue for the company.
An increase in prices and lower costs will give a significant advantage to Reynolds American, whereas its entry into the e-cigarettes segment will create a new monetizing opportunity for the company.
The early launch of Blu eCigs, however, will give the competitive advantage to Lorillard. Moreover, its new product approval will foster growth for the company.
All three companies are a "buy."
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