Altria Can Still Smoke the E-Cig Competition

Late is better than never when it comes to the cigarette alternative.

Feb 5, 2014 at 8:35PM

To understand that the tobacco industry views the electronic cigarette market as its future, look no further than the latest acquisition by Altria (NYSE:MO) of Green Smoke for $110 million. The purchase by the tobacco giant's Nu Mark subsidiary shows the importance being placed on rolling up key independent producers as a means of strengthening one's position in the industry.


Source: GreenSmoke, USA.

Because Lorillard (NYSE:LO) was the primary early mover in the e-cig market with its acquisition of blu eCig, it's been able to stake out a leadership position in the industry. Between blu and its more recent purchase of SkyCig, Lorillard now owns well more than a third of the market by units sold and has an almost 45% share by dollar. 

Yet it's still a wide-open field. At around $1.2 billion, e-cigs are still a tiny niche, representing about 1% of the $100 billion tobacco industry. Yet depending upon whose numbers you want to believe, that figure can soar to anywhere between $3 billion and $10 billion over the next five years -- and some believe it could even surpass regular cigarette sales within the next decade.

Make no mistake, attacks on tobacco will not relent, but as the industry titans establish bulkheads on the e-cig battleground, politicians, regulators, and activists will come after e-cigarettes as well. So-called "vaping bans" are being enacted with at least a partial rationale being that because e-cigs look like regular cigarettes, their proliferation will diminish the stigma anti-smoking crusaders have worked so hard to establish.

Yet smoking is inherently dangerous, contributing 80% of the lung cancer deaths in women and 90% in men, according to the American Lung Association. Since it's the tar created by burning tobacco that's the problem, e-cigs would be the safer alternative -- even if manufacturers can't market them that way -- because they contain 450 times lower levels of toxicants in their vapors than cigarettes have in their smoke. 

And since it is vapor, a mist, and not smoke, "secondhand smoke" concerns are lessened, though the FDA believes the matter of secondhand effects is not settled and can't be dismissed out of hand. Considering that a new study now suggests that "third-hand smoke" -- the residue that's allowed to settle into objects like tables, couches, or other surfaces -- is just as deadly as smoking the cigarette itself, it will create even more of a movement toward alternatives that don't produce smoke. 

Despite blu eCig's dominance, there are plenty of opportunities for new products to make their mark. Reynolds American (NYSE:RAI) recently introduced its Vuse brand into the Colorado market and almost instantaneously captured 62% of the market. Altria recognizes there's not only an opportunity in the U.S. but internationally as well, and it is partnering with Philip Morris International (NYSE:PM) to market and distribute e-cigs and other smokeless tobacco products on a global basis.

In its fourth-quarter earnings report last week, Altria noted that its flagship Marlboro brand cigarette suffered a 5.7% volume decline while its other premium smokes were down more than 11%. Even its smokeless products, like chewing tobacco, were down more than 4%. A lot of its future will reside in e-cigs or, as Altria calls them, e-vapor products.

Altria was late to the game and allowed Lorillard, Reynolds, and independent manufacturers to take a large portion of the market already, so look for it to make more such acquisitions to build up its portfolio. Green Smoke generated $40 million in revenue last year, meaning Altria paid 2.8 times sales for the company (or 3.3 times if incentives kick in). When Lorillard paid $135 million for blu, it paid 4.5 times the e-cig maker's $30 million in revenue. Revenues for SkyCig weren't disclosed, but Lorillard was willing to pay upward of almost $50 million for it, with another $50 million due in 2016 if it can hit certain financial performance targets, so Altria got Green Smoke for a decent price.

The tobacco giant may be a Johnny-come-lately to e-cigs, but I wouldn't snuff out its potential to become the biggest player in the space. As it's looking at this as a global opportunity, Altria may yet smoke the competition.

Ashes to ashes
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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
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Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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