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Philip Morris to Light Up E-Cig Market

You can get whiplash watching how fast global cigarette giant Philip Morris International (NYSE: PM  ) reversed course on the outlook for electronic cigarettes in its business.

This past summer, the international distributor of Marlboro cigarettes sounded contemptuous about the future of e-cigs, saying they ranked low on taste and had dubious manufacturing standards. E-cigarettes, it said, had a whole set of deficiencies that would limit their appeal.


But a few months have passed and Philip Morris apparently believes this is no longer a market it can ignore, announcing that it, too, will be introducing its own e-cig product within the next year, calling it its "greatest growth opportunity."

That's very similar to how Altria (NYSE: MO  ) responded earlier this year, going from being the only domestic tobacco company without an electronic cigarette on the market to jumping in with both feet and introducing its MarkTen brand. With regular cigarette sales falling for everyone, the e-cig market could be what ultimately saves the tobacco companies.

It's a $2.5 billion global market, half of it centered in the U.S.. Since Lorillard (UNKNOWN: LO.DL  )  blazed a trail, acquiring almost half the market when it purchased blu eCigs in April 2012 for $135 million, companies that eschew the potential for profit in e-cigs do so at their peril. 

Lorillard's blu eCigs recorded revenues of $63 million in the third quarter and $177 million over the last nine months, generating gross profits of $15 million and $54 million, respectively. The cigarette maker is generating operating margins of 5% year to date on the product, and while it was only breaking even this past quarter, that was the result of a big advertising push, which helped drive up the brand's market share.

Though this will likely change soon, e-cigs are unregulated, as they use ingredients already approved by the FDA, and remain largely untaxed. For that reason Philip Morris finds it surprising that they remain a relatively low repeat-purchase product, though it says that can be blamed on the lack of taste, along with slower delivery of the nicotine high that smokers crave.

Even so, it thinks it can have an e-cig on the market by the second half of 2014 that overcomes those limitations, and that the industry itself can be attractive so long as governments refrain from excessively taxing it. While that seems like a bit of wishful thinking, the market has grown at a 25% clip over the past two years, so it does indeed seem to be the industry's greatest growth opportunity. But these late entrants may have a hard time making up for lost time, and their own chance to grab a meaningful share of the market may have gone up in smoke.

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9/30/2016 4:05 PM
PM $97.22 Down -0.56 -0.57%
Philip Morris Inte… CAPS Rating: ****
LO.DL $0.00 Down +0.00 +0.00%
Lorillard CAPS Rating: ****
MO $63.23 Up +0.41 +0.65%
Altria Group CAPS Rating: ****