Reynolds American, Inc. (RAI), Lorillard Inc. (LO), Altria Group Inc (MO): Can E-Cigarettes Be a Life Saver for Tobacco Companies?

The tobacco manufacturing industry has been under deep regulatory scrutiny for quite a long time. Higher taxes, increasing health concerns, and smoking bans in public places have affected sales in the big U.S. companies. Consumption of tobacco products fell 27% from 2000-2011 according to Centers for Disease Control and Prevention. Although the e-cigarette market represents only a fraction of the U.S. tobacco sector, sales have been increasing over the last few years amid the health issues widely known. E-cigarettes vaporize nicotine liquid, making it inhalable and avoiding the carcinogenic elements present in traditional cigarettes enabling indoor consumption.

New Players

Some U.S. companies are trying to enter this new prosperous market. One of them is Reynolds American, Inc. (NYSE:RAI), which released its first battery-powered e-cigarette. The company has 27.6% of the total market share of traditional cigarettes. With its Vuse brand, Reynolds American, Inc. (NYSE:RAI) has redeveloped the e-cigarette and is investing heavily in marketing campaigns to increase awareness in the consumer populace. This way, it is attempting to differentiate from the hundreds of other brands, mainly made in China. The estimated market for this product is at $1 billion (of a total of $90 billion in the traditional channel), but could be a great bet for the future in this declining industry.

Reynolds American, Inc. (NYSE:RAI)’s stock price is not feeling the general sales deceleration present in the industry, as it has gained more than 14% so far this year. It is trading above the industry average at 18 times P/E ratio and 2.9 times PEG ratio, which could indicate the stock is overvalued. It is also under-performing regarding the return on assets at 9 times, while the industry average stands at 14.7 times. The same goes for the return on equity at 27 times, versus the industry average of 108 times. Entering the e-cigarette market could be a game-changer for Reynolds American, Inc. (NYSE:RAI) to return to a growth path similar to its peer group.

Another company that does not want to be left behind is Lorillard Inc. (NYSE:LO). This was the first of the big tobacco companies to enter this market through its 2012 acquisition of Blu Ecigs for $135 million. The company has 12.7% of the traditional cigarettes market share. The Blu Ecigs brand is reaching $50 million in revenue, according to the company’s presentation, and claims to be the leading brand in the sector. The company is investing in marketing campaigns and retail expansions for its product.

Lorillard Inc. (NYSE:LO)’s stock has also gained in the past year. It increased more than 5% amid some ups and downs. It is trading at 14 times P/E, a bit lower than the industry average, and its PEG ratio is 1.2 times. The company’s return on assets is 34 times above the industry average. This company could be a good bet to enter the tobacco industry and gain exposure to the e-cigarette sector.

Finally, the biggest player in the traditional cigarettes market, with 49.2% of market share, will also enter the e-cigarette industry this year: Altria Group Inc (NYSE:MO). The producer of Marlboro will certainly heat up the competition, as it is expected to join this market with its own e-cigarette brand. Altria Group Inc (NYSE:MO) is aware that the smokeless products category has been growing and does not want to lose a piece of this market, one that looks promising regarding future prospects. The company reported a 7% growth from 2011 to 2012 in smokeless products, totaling $959 million.