While some think that “Big Tobacco” will eventually expand into legalized marijuana to chase growth — this is still a highly speculative situation that isn’t exactly guaranteed. While overall cigarette volumes are dropping in the U.S., tobacco companies are looking to find new ways to generate profits now. The current trend of tobacco companies primarily favors the exploration of smokeless products and other innovations such as electronic cigarettes.
Are “e-cigs” the savior for Big Tobacco’s future?
The current leader pulling away from the rest of the pack in the selling of e-cigs is Lorillard Inc. (NYSE:LO). Lorillard bought electronic cigarette maker blu eCigs last year for a cool $135 million, and the positive effects are beginning to be felt.
Image: Lorillard Inc. (NYSE:LO)
Reynolds American, Inc. (NYSE:RAI) is also looking to get in on the action. Looking to add to its portfolio of smokeless products, such as its Camel SNUS pouches — which dominate the SNUS market with an 80% share — Reynolds American, Inc. (NYSE:RAI) is developing its own electronic cigarettes. After a limited launch last year of its Vuse e-cig, the company is apparently planning a nation-wide launch as soon as this year.
Late to the game, Marlboro-maker Altria Group Inc (NYSE:MO) is also getting into the electronic age of cigarettes. Altria, the largest tobacco company in the United States, recently announced that they too have plans to release an e-cig of their own. Many analysts think that the company’s massive size and scale could help it make significant progress in gaining significant share in the growing and lucrative e-cig market. The company’s Chief Executive, Marty Barrington, officially stated that:
We are pleased to announce another step in our efforts to address the changing preferences of adult tobacco consumers… In the second half of this year, Altria Group Inc (NYSE:MO)’s subsidiary, Nu Mark, plans to introduce an electronic cigarette.”
So, just how promising is this futuristic electronic cigarette market that Big Tobacco seems to be pouring into?
The rise of the electronic cigarette…
The overwhelming majority of electronic cigarettes currently on the market ironically do not involve any tobacco. Most e-cigs, in fact, deliver a tobacco-less, nicotine-laced vapor to a smoker’s lungs — which is being touted as supposedly “healthier”, or even as a way to help someone quit their addiction to real cigarettes. Whether or not this “healthier” image is actually correct or just smoke and mirrors is a separate issue, but the odorless vapor emitted by e-cigs is currently allowed to be exhaled in many public places where real cigarettes are banned.
In other words, they don’t (at least as of now) have the extremely negative public image that real cigarettes do.
Most e-cigs also cost only half as much as their tobacco-filled cousins, which offers another practical incentive for a traditional tobacco smoker to “go electronic”. While sales of electronic cigarettes totaled only about $500 million in 2012, they are estimated to generate over $1 billion this year — and this number could grow as more players enter the market and make the electronic products “more mainstream” by increasing public awareness.
So, how to invest?
| P/E | Forward P/E | Dividend (yield) | |
|---|---|---|---|
| Lorillard | 13.74 | 12.49 | $2.20 (5.10%) |
| Reynolds American | 17.58 | 13.90 | $2.36 (4.90%) |
| Altria | 16.70 | 14.04 | $1.76 (4.80%) |
Data obtained from Yahoo! Finance on May 7, 2013
Lorillard Inc. (NYSE:LO)’s “cheapness” in comparison to its peers likely has much to do with its current heavy reliance on menthol cigarette products. The company owns the leading menthol brand, Newport. The FDA one day banning menthol tobacco products seems to be weighing on the company’s valuation. While a menthol ban may be only a temporary fear, if it is indeed banned, Lorillard will feel the pain.
If these fears don’t concern you, however, and you are willing to bet on Lorillard Inc. (NYSE:LO), you will be getting nice yield at a relatively fair price — as well as a piece of the current leader in the lucrative electronic cigarette market.
The article Lorillard and the Electronic Future of Big Tobacco originally appeared on Fool.com and is written by Joseph Harry.
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