The cultural shift toward everyday behavior that is more health-conscious is undeniable, and the latest example of this can be seen in the recent popularity shown in the electronic cigarette.  E-cigarettes have replaced the paper dinosaurs that marked the generations of our fathers and grandfathers -- and there are some key distinctions that will be seen in the market as a result of these emerging trends.  Since those of us that are non-smokers might not be acutely aware of the developments in this industry, it makes sense to start paying attention to these opportunities because there are some critical developments in tech that are changing the game and altering the outlook for how the sector is approaching certain markets.  

“The trends are relatively clear, at this stage as more and more consumers are making the transition to healthier tobacco alternatives,” said Sam Hadi at CloudCig.  “Increases in domestic usage led to electronic cigarette sales of more than $1 billion in 2013.”  These numbers are pretty impressive, given the fact that these products have been available in mainstream markets for a relatively short period of time.  Roughly 2.7% of American adults have already tried an e-cigarette.  Additionally, 2.5 million people in the U.S. have made the transition complete and are no longer buying the more traditional paper tobacco products.  

What Does this Mean for the Broader Market?

While these numbers signal that a major market change is in place, we are still in the early stages as most of the larger cigarette manufacturers have not yet stepped in and started offering their own versions of the e-cig.  But recent stories show that this could all be changing very soon.  The latest example here can be seen at Altria Group, where some substantial investments have been made to develop subsidiaries that will begin manufacturing electronic products.  More traditionally known under the name Philip-Morris, Altria is one of the largest cigarette producers in the world and the company’s decision to enter into the newer arena suggests that the electronic cigarette is here to stay -- and that these items will create additional drivers to support corporate earnings numbers.  

At the beginning of the month, Altria’s Nu Mark subsidiary announced its acquisition of Green Smoke (an e-vapor company) for $110 million.  Their first product issuance is the MarkTen, which has already been introduced to test markets in Arizona and Indiana toward the end of last year.  Altria was the last major cigarette manufacturer to begin marketing a battery-powered device that heats a solution of liquid nicotine, so at this stage it is clear that all of the major players are involved in the changing trends.  So, while the testing in certain markets has yet to reach completion, the early signs are encouraging and it has become increasingly clear that cigarette companies have another “cash cow” on their hands with these new devices.

New Tech’s Potential Impact for Stocks

Having an almost entirely new product that has already been met with impressive popularity is a clear positive for the companies that have gained exposure in these areas.  Going forward, it will be interesting to see how these trends impact stock markets as well -- and some of the best-positioned companies can be seen in Lorillard (LO), British American Tobacco (BTI), and now Altria (MO).  

Lorillard was arguably the first of the major manufacturers to place its focus on positioning within the e-cigarette market, and acquired Blu eCigs in 2012.  The company has also purchased UK brand SKYCIG, which will help give Lorillard more of a global presence.  In the e-cigarette market, the company commands a 49% market share, and the performances seen in coming quarters will be key in determining the broader trends for the sector.  The also carries a 4.2% dividend yield and its share prices have recently been supported by the company’s stock repurchase plan, which is currently valued at $1 billion.

British American Tobacco offers global positioning as well, and its Vype e-cigarette will soon be made available at retail outlets.  It’s currently available online and is expanding to retail outlets.  BTI owns 42% of Reynolds American (exposure valued at $11.5 billion), which markets its VUSE  e-cigarette in parts of the U.S.  BTI carries with it a dividend yield of 2.7%, so the stock should continue to look attractive for broad sections of the market.  Finally, Altria’s new plans (outlined above) round out the list of companies to watch, and corporate earnings going forward could be supported by its newest product offerings.  The company has decided to retire $1 billion into Q3 2014.  All of this comes with a dividend yield of  and 5.2%, making it another bullish candidate for the remainder of this year.

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Comment by Daologic on July 16, 2014 at 1:25pm

Thanks Richard, good article but....those "Roughly 2.7% of American adults have already tried an e-cigarette" they have never experienced a good Cuban cigar and an good old scotch :)

Comment by Himanshu Jain on July 20, 2014 at 12:20am

You couldn't be more correct, Dao :)

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