E-Cigarettes: How to Profit From Their Exploding Growth

E-Cigarettes: How to Profit From Their Exploding Growth

"More doctors smoke Camels than any other cigarette."

From 1946 through 1954, in a variety of national magazines and on the radio, the message was relentless. Fast forward six and a half decades and CDC is behind an ad campaign that is also effective but sends a different message -- quit smoking! If quitting for health reasons wasn't enough, then as per Berman's research, the average smoker earns 15.6% less than his non-smoking peers.

By 2050, Euromonitor estimates that a full 4% of the global smoking market will have switched over to e-cigarettes. According to Bloomberg, e-cigarette sales are expected to surpass traditional cigarette sales by 2047. By some estimates, e-cigarettes are already projected to become a $1.7 billion industry in the U.S. by the end of this year.

This is why tobacco companies depend on e-cigarettes now. Altria Group , Reynolds American and Lorillard have started selling e-cigarettes in order to make up for declining sales of cigarettes as awareness about the dangers of tobacco spreads. Let's take a look at the moves they have been making.

Altria's diversification is its strength
Altria Group, the largest manufacturer of tobacco products in the U.S., has a diversified business model as it operates in three segments -- smokeable products, smokeless products, and wine. It also holds a 27% stake in SABMiller. This diverse portfolio makes the company one of the most defensive tobacco companies as it does not depend on just tobacco products for revenue.

Altria launched the MarkTen brand of e-cigarettes in August 2013. This means that the company is a new entrant in this market which is dominated by the first mover -- Lorillard's Blu brand of e-cigarettes. Altria's net revenue increased 5% year over year to $6.6 billion in the third quarter on the back of strong sales in the smokeless and smokeable products segments. Its adjusted earnings per share grew 12.1% versus the year-ago period to $0.65 per share.

Altria has an excellent record of paying dividends. During the third quarter, it increased its dividend by 9.1% which marked the 47th dividend increase in 44 years. During the third quarter, Altria paid $883 million in dividends and repurchased shares worth approximately $156 million. Altria reaffirmed its 2013 earnings guidance range of $2.36-$2.41 per share, representing a 7%-9% growth rate from $2.21 per share in 2012.

Reynolds' moves
E-cigarettes are attracting customers because they are cheaper than other tobacco products, and hence this attracts tobacco players and leads to innovation. Recently, RJ Reynolds Vapor Company, a newly formed subsidiary of Reynolds American, reengineered and developed a patented vapor technology. The company developed a brand called Vuse for the e-cigarette category.

Reynolds expanded the distribution of Vuse Solo and the Vuse System in Colorado in July 2013. For the first time since "More doctors smoke Camels than any other cigarette," cigarette ads could once again become pervasive as Reynolds American plans a nationwide roll-out of its Vuse e-cigarette after an encouraging response in Colorado.

Reynolds reported mixed financial results for the third quarter. Sales volumes in the tobacco industry have been decreasing due to tougher regulations, higher retail prices, and growth in the e-cigarette category. Reynolds' sales volume for traditional cigarettes dropped almost 4.3%. Going forward, the company plans to focus on e-cigarettes to make up for the decline in traditional tobacco products.

Reynolds also lost 0.5% market share versus the year-ago period. It reported third-quarter revenue of $2.14 billion, which was a 0.9% increase from the year-ago period. Adjusted earnings came in at $0.86 per share, which marked a 8.9% increase from the same quarter a year ago. As a result of a muted performance, Reynolds American revised its earnings guidance for the year to a range of $3.17-$3.27 per share from the previous expectation of $3.15-$3.30 per share.

Lorillard: The pioneer
Lorillard remains the king of the market as far as the e-cigarette segment is concerned. It has the first-mover advantage and it has continued to perform well as a result. After acquiring Blu in 2012, the company expanded its distribution channel from 12,000 to 127,000 retail stores. As a result, Blu has attained a 49% share of the U.S. electronic cigarette market.

Lorillard delivered good third-quarter results as revenue climbed 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 the consensus estimate on earnings with adjusted earnings of $0.83 per share, 15.3% higher than the year-ago period.

Going forward, Lorillard is expanding into the U.K. e-cigarette market. It has signed an agreement to acquire SKYCIG, a leading premium brand of electronic cigarettes in the U.K. This will boost Lorillard's sales as the e-cigarette segment is evolving rapidly.

Bottom line
The market for traditional tobacco products is weakening. E-cigarettes are the new growth driver for this industry. This is why investors should be inclined 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. Also, Lorillard has an impressive dividend yield of 4.40%. Investors who are looking for an investment in the tobacco industry should definitely take a look at Lorillard.

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The article E-Cigarettes: How to Profit From Their Exploding Growth originally appeared on Fool.com.

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