Normally one might not consider a tobacco company to be in the technology game. But electronic cigarettes, or e-cigs, are allowing these companies to adapt to the growing stigma associated with smoking, and are poised to continue to an already impressive growth-spurt, creating an opportunity for companies and investors alike. The growing market for these gadgets has attracted some solid competition, but Lorillard (NYSE: LO ) , with an already formidable market presence and recent investments, stands a good chance of continuing its reign of dominance.
E-cigs vaporize a nicotine-laced liquid to create water vapor, which is then inhaled by the user not only to deliver nicotine, but to mimic the smoking experience. Many smokers aren't just addicted to nicotine, but to the physical act of smoking itself, and the visual appeal of the smoke it produces. Smokers do their thing for any number of reasons, but wanting to shorten one's lifespan is rarely one of them. E-cigs try to tackle that tendency.
Users still get get the "feeling" of smoking without the social blasphemy of second-hand smoke. Since it's just steam they can normally smoke indoors, giving consumers some long lost freedom. Most importantly, e-cigs are generally considered a more healthy way to indulge nicotine cravings, since inhaling nicotine-laced steam is less damaging than the chemical cocktail with which most cigarettes are made, though health claims are still being researched and are thus widely disputed.
From a business standpoint, the e-cig market is booming (see here), and there are a lot of players vying for spots. Right now Lorillard, who owns the popular blu e-cig, is the big hitter. However, if you broaden your view from e-cigs to the tobacco industry in general, the outlook gets even better. According to BBC, the number of smokers worldwide is growing, especially in the developing world. Once smokers in China and Russia start transitioning to "healthier" options, the e-cig market could explode in the long-term.
That growth potential is on top of the already high expectations for the e-cig market. The Economist reports that "Bonnie Herzog of Wells Fargo...believes sales of e-cigarettes could overtake sales of the normal sort within a decade." With a market of more than $80 billion , that is nothing to sniff at.
There is also the added advantage that e-cigs remain highly unregulated. The jury is still out on how exactly the FDA will proceed. Even with the FDA breathing down their necks, though, e-cig makers can still advertise these new products on television, which is big, because marketing efforts should still be able to exercise considerable influence. With a regulatory environment that is still maturing in the US, a growing tobacco market globally, and the user advantages associated with switching to e-cigs, there is still a lot of room to grow.
Down to brass tacks
So the big question is how to play this growing e-cig market as an investor. While Lorillard has seen diminishing operating income from blu cigs, they remain on top, according to the Wall Street Journal. Additionally, they have been investing a lot in marketing to ensure they retain market share, likely due to increased competition from the likes of Reynolds American (NYSE: RAI ) and Altria (NYSE: MO ) . And remember — those TV spots could go a long way.
There may be new players entering the market, but blu cigs have built a solid base of brand recognition. With so much effort spent marketing they very well may hold their ground. Additionally, in October they acquired British e-cig maker SKYCIGS, which will help them diversify and compete with British American's Vype. That being said, once Altria enters the game it will likely have a lot of firepower, as its other popular business segments will provide vast reserves to dig into in developing its line of e-cigs. And Reynolds American's Vuse e-cig had an impressive start in Colorado, the WSJ said.
Although most of these companies seem to be good options from a financial perspective, all boasting dividend ratios north of 4% to supplement growth with income and P/E ratios below the industry average to indicate growth potential, Lorillard has some stronger vital signs. Their return on assets more than triples Reynolds American. Their current ratio is 1.83, far above competitors. These details alone mean that Lorillard has more assets relative to debt and is making more with those assets, indicating that this is a well-managed company in solid financial health.
Some may have commented that Lorillard has been seeing less money from blu cigs lately, but net income remains on par with their competitors and the amount they've been pouring into advertisements and commercials could easily pay off in time, especially given an already formidable market presence and prevalent TV spots. If you chose to invest in the e-cig boom, you'd be making a wise call. If you chose Lorillard to do that, you'd be making an even wiser one.