Sin stocks, or shares in businesses engaged in activities traditionally deemed sinful, are an interesting market sector. The companies usually have steady demand and excellent profit margins but often do not offer much growth. There are circumstances when they can produce unexpected gains, however. Cigarette manufacturer Lorillard (LO.DL), gaming-products provider Scientific Games (LNW -1.78%), and beer maker Molson Coors Brewing (TAP -1.52%) are three sin stocks that could provide such a surprise in 2014. Are their stories enticing enough for consideration? Let's see.
Lorillard: Potential gain in a tough environment
Lorillard, the third-largest cigarette maker in the U.S., operates in a very harsh environment. The industry's regulatory hassles and legal woes are well known, but Lorillard faces a particularly perilous event. After a scientific review found that menthol made it easier to start smoking and harder to quit, the Food and Drug Administration ("FDA") is considering banning the substance in cigarettes. While currently weighing its options, the FDA is expected to make a decision in 2014.
The fear of a negative ruling has pressured Lorillard's stock. The company's dominant position in menthol cigarettes is a major competitive advantage. Year to date, the cigarette maker's domestic unit volumes only decreased 0.2% when total industry shipments dropped an estimated 4%. If FDA regulations on menthol aren't too draconian, returning stock market confidence would likely support Lorillard shares.
Growth in electronic cigarettes may also give the company a boost. Electronic cigarettes, otherwise known as e-cigarettes, are battery-operated products that turn nicotine and other chemicals into a flavored vapor that is inhaled by the user. A small market currently, e-cigarettes have a lot of potential. Analysts think total U.S. sales could reach $1.5 billion in 2013, triple the amount from 2012.
Lorillard's blu eCigs brand, currently with 49% of the domestic electronic- cigarettes market, will likely partake in much of the growth. A favorable FDA ruling and continued e-cigarette gains could make Lorillard's new year surprisingly good.
Scientific Games: Ready to win with online gaming
Scientific Games, a product developer for the gaming and lottery industry, looks like it may profit from the growth of online gambling. Gaming on the Internet seems to have great possibilities. Even the U.S. Congress, not known as being a proactive body, appears engaged. Three Congressional bills related to online gaming have already been introduced.
A leading lottery-products and services provider, Scientific Games looks well suited for the trend. After a recent acquisition of casino-equipment and game maker WMS Industries, the company can now offer ready-to-go online casino-style games to its state lottery contacts. Already in Delaware, officially the first state in the U.S. to go live with comprehensive intrastate interactive gambling, Scientific Games, partnering with experienced European-based operator 888 Holdings, won a five-year contract to operate the state's gaming system.
A management shakeup adds some intrigue to the company's prospects. David Kennedy was abruptly named CEO recently, replacing Scientific Games' longtime chief. Renowned investor Ronald Perelman, an astute deal maker maybe best known for his investing activities in the 1980's, simultaneously became chairman. This, in essence, looks a tightening of control by MacAndrews & Forbes Holdings, the gaming-products and services provider's largest shareholder.
The combination of online gaming growth and increased involvement by MacAndrews & Forbes, owned by Mr. Perelman and where Mr. Kennedy has served as president, indicates 2014 will likely be a very eventful year for Scientific Games.
Molson Coors Brewing: Making the best of a stagnant market
Molson Coors Brewing, one of the world's largest beer makers, has found the brewing business more difficult lately. U.S beer sales have declined more than 2% in the last five years and a growing movement toward craft brands hurt big brewers even more.
The brewer has certainly felt the pain. Molson Coors' beer volumes dropped noticeably in the latest quarter, primarily due to lower sales in Canada and the United States. Volumes in Canada plummeted 5.2% and MillerCoors, a U.S. joint venture between Molson Coors and SABMiller, reported sales to retailers fell 3.1%.
Though its beer doesn't sell like it used to, Molson Coors is doing well financially. Free cash flow has increased 0.2% year to date, thanks to a successful consolidation of the brewing industry. Starting with the company's formation through a 2005 merger of Canadian-based Molson with U.S.-based Coors, the brewer then set up the MillerCoors joint venture in 2007. Looking overseas, Molson Coors brought in leading European brewer StarBev in 2012. In each instance, the company squeezed out costs and maintained pricing power.
An increased appetite for craft beers might be Molson Coors' move in 2014. In dollar terms, craft beers now represent 10.2% of the domestic beer market and their share continues to grow. Large brewers are taking notice. MillerCoors and Anheuser-Busch have already purchased smaller craft-beer makers and Molson Coors bought the Ireland-based Franciscan Well craft brand earlier this year. This acquisition was the first from the company's emerging markets and craft-beer unit, set up to develop a craft-beer business line. While initially focusing on Ireland and the UK, Molson Coors' attention to specialized beers should only grow.
Conclusion
Sin stock companies don't usually exhibit much inherent growth, but circumstances occasionally present an expansion opportunity. Lorillard, Scientific Games, and Molson Coors may all have a chance to expand in 2014. If they can succeed, shareholders should also benefit. These sin-stock stories seem enticing enough that each company probably deserves a good look in the new year.
