Most of the cigarette and tobacco producing companies have evolved enough to produce e-cigarettes, or risk free products. Altria Group (MO), Reynolds American (RAI) and Lorillard (LO) have recently started producing e-cigarettes in order to mitigate the declining sales of tobacco products as the awareness about the dangers of tobacco spreads rapidly.
Altria Group, being the largest manufacturer of tobacco products, enjoys strong diversity region as it operates across various segments such as smokeable products, smokeless products and wine. The company also holds a 27% stake in SABMiller. With such diversity across its product line, it becomes a very defensive company that does not wholly depend on tobacco products for its revenue.
In the second half of 2013, Altria had launched MarkTen brands of e-cigarette. As a result its net revenue increased 5% to $6.6 billion year-on-year. The growth in revenue was not only fueled by e-cigarettes, but also from strong sales in smokeable products. Consequently, Altria’s adjusted earnings per share increased 12.1% to $0.65 per share.
In addition, Altria has a sound record of paying dividends. It increased its dividends by 9.1% in the third quarter. The company has paid dividend for 44 consecutive years. It paid a total of $883 million in dividends in the third quarter and repurchased shares worth approximately $156 million.
One of the estimates given by Euromonitor states that 4% of the global smoking market will get transition to e-cigarettes by 2050. Besides, Bloomberg also reported that e-cigarette sales are expected to surpass traditional cigarette sales by 2047. By some estimates, e-cigarettes are already projected to be a $1.7 billion industry in the U.S. by end of this year.
One of the reasons, why e-cigarettes are attracting customers across the world is because of cheaper pricing as compared to tobacco products, therefore leading to innovation. Thus, Altria certainly is moving in the right direction, and will be benefited by the e-cigarette category as it is an early mover in the segment, which will help the company to gain market share in the segment.
A Look at Reynolds
Of late, RJ Reynolds Vapor Company, a newly formed subsidiary of Reynolds American, has developed and re-engineered a patented vapor technology. It has also developed a brand named Vuse under the e-cigarettes category.
Reynolds had expanded the distribution of Vuse Solo and Vuse System in Colorado in the second half of 2013. Reynolds American plans a nationwide rollout of its Vuse e-cigarette, which had gained significantly good response in Colorado.
But, Reynolds declared mixed financial results for the third quarter. Reynolds’ sales volume of smokeable cigarettes deteriorated to 4.3% due to higher retail prices, tougher regulations and the increasing popularity of e-cigarettes. As it moves forward, it remains focused on e-cigarettes to recover the decline in traditional tobacco products.
Lorillard the Leader
Lorillard holds the top position in the e-cigarette segment is concerned. It is the earliest bird in the category, thus enjoying a competitive edge over its peers. It had acquired Blu in 2012 and expanded its distribution channel from 12,000 to 1,27,000 retail stores as a result.
Lorillard delivered a strong third quarter, and its revenue grew 10% versus the same period in the previous year to $1.8 billion on the back of strong sales of electronic cigarettes and regular cigarettes. It also beat consensus estimates on earnings and reported adjusted earnings of $0.83 per share, which was 15.3% higher than the year-ago period.
Going forward, Lorillard is focused on expanding into the UK e-cigarette market, and it has also signed an agreement to acquire SKYCIG, a leading premium brand of electronic cigarettes in the UK. This will boost Lorillard’s sales as the e-cigarette segment is evolving rapidly.
On the contrary, the market for traditional tobacco products is weak. E-cigarettes are the new growth drivers in the industry. This is why investors should be looking toward an investment in Lorillard, the first mover in the category. Lorillard is now expanding its e-cigarette business while the others have just started off domestically.