Tuesday, April 29, 2014
A New Market in Electronic Cigarettes
It’s been a rocky week as earnings continue to flow in, all major indexes ended the week in the red as the Dow shed over 140 points on Friday. It appears as though investors have begun to take notice of several notable earnings misses and more importantly the continuing escalation in Ukraine. Personally I feel that the sell-off on Friday sets up a good opportunity to buy stocks at slightly cheaper prices, especially of companies that announced good earnings like Apple for example.
But once again it is not might style to predict the short term future of the overall stock market, instead I want to fulfill my promise from last week, which was to shed light on the alternative tobacco market specifically the electronic cigarette market.
In last week’s article I wrote about the current state of the tobacco market, and analyzed earnings from Philip Morris International. I came to the conclusion that although geopolitical tensions and stagnation and collapse in the emerging markets might have negatively affected cigarette sales the future of the tobacco industry is far from bright.
With that said, however, I also stated there is a bright side for tobacco companies and that is the fast growing market for alternative tobacco products like Electronic cigarettes. So far this market is worth about $2 billion, which is tiny when you think about it considering that the entire world tobacco market is worth over $700 billion. Now it is highly unlikely that electronic cigarettes will ever prove to be as profitable as regular cigarettes but it is very possible that E-Cigs could grow to become a $10-30 billion industry in the next 3-5 years.
The E-Cig industry has also gotten a huge boost last Thursday as the Food and Drug Administration (FDA) has finally announced its new regulations over the sale of electronic cigarettes. And as far as regulation go the FDA’s new rules over the sale of E-Cigs were tame to say the least. The new regulations will not hamper the efforts of big Tobacco companies from entering the electronic cigarette market but they will force any company that plans on marketing an E-Cig to get FDA approval first (current E-Cig companies will have 2 years to submit their products for FDA approval).
Other rules created by the FDA regulations are pretty standard, the regulations ban the sale of electronic cigarettes to minors, and they also prohibit free samples. The good news is that the regulations say nothing about prohibition of advertising, and flavoring. Basically the new regulations help protect current Electronic cigarette companies from competition.
The new FDA regulations might prove instrumental in helping solidify the electronic cigarette industry and gives it some creditability. The question now becomes which companies are in the best position to set themselves up in this new and fast growing industry.
Currently the largest Electronic cigarette brand is Blu which is owned by Lorillard, which is already a large player in the tobacco industry, with a market cap of $19.6 billion. The company owns the Newport brand of cigarette which on its own is a huge moneymaker, throw in Blu, which Lorillard owns through its LOEC subsidiary and you get a company that is a huge rival to any tobacco company. The company also clearly see’s that its survival depends on its exploitation of the Electronic cigarette market, which so far the company has done well as it purchased another E-cig maker during the 3rd Quarter of 2013, the British company SKYCIG.
Lorillard has performed well in the last year with shares increasing over 27% and the stock has not performed badly this year when compared to the rest of the stock market, shares are up 6.79% year to date. Lorillard is definitely a huge player in the E-Cig field but as the top dog some may feel that the company has nowhere to go but down, I personally disagree since Lorillard’s Blu E-Cig currently controls 50% of the market which still leaves plenty of room to grow, at least in my view.
Lorillard is not the only large tobacco company that has embraced electronic cigarettes, its competitors Altria, and Reynolds American have both recently released a line of their own Electronic cigarettes, but with that said all these companies are huge multi-billion dollar corporations and electronic cigarettes compose a very small percentage of their profits.
So these giants might not be the right fit for investors looking to profit from the E-Cig market, these investors might be better off looking at companies that strictly focus on Electronic cigarettes, companies like Victory Electronic Cigarette Corp and Vapor Corp.
When compared to other Tobacco companies these companies are small time, Victory Electronic Cigarette Corp (ECIG) has a market cap of $670 million, while Vapor Corp has a market cap of just over $105 million. Now compare this to the multibillion dollar tobacco giants and it might paint a picture of doom for these small companies. But apparently investors did not mind the heavy competition and last year both ECIG and Vapor Corp saw their stocks fly through the roof (Vapor Corp is up 218% in the last year and ECIG is up a remarkable 2036%!).
Now though with the volatility on the market and competition from large tobacco companies posing more of a threat investors have sought to punish these upstart electronic cigarette companies ECIG is down 30% in the last month and Vapor shares have also fallen 29% year to date.
Personally I feel like these companies will not survive very long in an electronic cigarette market soon to be home to all the major tobacco players, but with that said they do provide far more upside potential then there larger competitors. Either way if you are hoping to get in on an up and coming market electronic cigarettes are definitely an option.
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