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E-Cigarettes: The End of Smoking?

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With the U.S. smoking rate in a nosedive, the nation's three largest tobacco companies -- Altria (NYSE: MO  ) , Reynolds American (NYSE: RAI  ) , and Lorillard (NYSE: LO.DL  )  -- face an existential threat. A committed cadre of anti-tobacco activists is determined to drop the smoking rate all the way to zero. By acting on a number of fronts that include excise tax hikes, laws that ban smoking in public places, and legal victories for anti-tobacco groups, activists have helped lower the U.S. smoking rate from 32% in the 1980s to 18.1% in 2012. However, new measures must be found and implemented in order to drop the rate to zero.

Americans have a strong sense of their right to do to themselves what they please, even when it involves activities they would be better off avoiding. Just look at the push for marijuana legalization, which is starting to sweep across the nation on a state-by-state basis. Except in certain medical contexts, Americans would be better off not smoking marijuana. However, public sentiment is starting to sway in favor of individual rights. This is all the more evidence that anti-tobacco activists need to find a solution other than the heavy hand of government to put an end to the smoking epidemic.

E-cigarettes: Less harmful, less expensive, more profitable
Electronic cigarettes, or e-cigarettes, may be the answer to everyone's problems. Altria, Reynolds American, and Lorillard are each making a push into the nascent category, while even do-gooder health advocates who are waging open war on the tobacco companies have opened up to the possibility of e-cigarettes replacing traditional cigarettes.

Jonathan Foulds, a tobacco addiction researcher at Penn State, says "e-cigarettes are at least 90% less harmful" than traditional cigarettes. He notes that most of the chemicals that smokers inhale are the result of burning tobacco. E-cigarettes neither contain tobacco nor produce smoke. Instead, users inhale vaporized nicotine; the vapor contains significantly fewer harmful chemicals than cigarette smoke.

Foulds concludes that "any cigarette replaced by [an e-cigarette] is probably a step in the right direction."

Andy Schamisso, a former cigarette smoker and the proprietor of Inko's White Tea, is a perfect example of how nicotine addicts can quit smoking cigarettes and start using less-harmful e-cigarettes. Schamisso used to smoke a pack of cigarettes every day, but he completely switched to the NJOY e-cigarette in one week. He likes NJOY because it looks like a real cigarette and because it "[gives] me an appropriate smoky, semi-harsh hit at the back of my throat" that is similar to that of a real cigarette.

Schamisso says NJOY was ideal for helping him quit smoking because it offered him a nicotine hit whenever he needed it. "A key aspect for me was the security I felt having it in my pocket, knowing if something -- stress or whatever -- was hitting me, I could reach in my pocket, pull it out, and have a drag," he says.

In addition, Schamisso spends far less money on e-cigarettes than he used to spend on traditional cigarettes. He used to spend $70 per week to smoke a pack of cigarettes each day, but he now spends about $15 per week on e-cigarettes.

Smokers are not the only ones with a strong financial incentive to switch to e-cigarettes. John Przybylo, owner of e-cigarette retailer Vapor Haus, says retail margins on e-cigarette refills typically run as high as 50%. He says it "costs about $4.50 to make and label a quality bottle of 10ml E-liquid. We sell it for $8.95." On the other hand, gross profit for a convenience store on a pack of cigarettes is typically less than 16%. As a result, retailers may give e-cigarettes significantly more shelf space in the coming years.

That would be good news for Lorillard, which owns Blu -- the leading e-cigarette brand. Reynolds American is introducing its Vuse e-cigarette to a wider market after tests in Colorado and Utah proved successful. Altria recently acquired Green Smoke, a manufacturer of premium e-cigarettes, and hopes to mount a significant challenge to Blu.

Some experts believe e-cigarettes will become a crucial part of tobacco companies' revenue in the coming years. Wells Fargo analyst Bonnie Herzog says, "We have increased conviction that consumption of e-cigs could surpass consumption of conventional cigs within the next decade."

Foolish takeaway
If e-cigarettes gain widespread popularity and lead to the decline of cigarette smoking, it could be a win for all parties involved; tobacco companies would have a new and growing industry to dominate, consumers would have an attractive alternative to cigarettes, and anti-tobacco activists may eventually rejoice as they see zero cigarette smokers. Therefore, investors in Altria, Reynolds American, and Lorillard should closely monitor each company's progress in the e-cigarette market -- it could soon become the most important product category in the tobacco industry.

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Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2014, at 10:04 AM, dandude12 wrote:

    The only hurdle I can see is law enforcement. Our state had a bill up to make them illegal to smoke in public because cops couldn't tell them from the real thing.

  • Report this Comment On February 22, 2014, at 12:21 PM, JamesUSA wrote:

    Apparently not, as the liberal control freaks are passing laws left and right to regulate E-Cigs out of existence.

    This not because they are harmful to others, but because it LOOKS LIKE other people are doing something they have been trained to hate.

  • Report this Comment On February 22, 2014, at 5:48 PM, Maiky wrote:

    Thanks to Vape-pens and mods I was able to quit a pack a day habit (Marlboro Reds). Cigs are nasty, I didn't even realize it till i quit. Now I smell like a normal human being, feel great and have more cash in my pocket.

    I hope the tobacco companies take a massive hit to the wallet in these coming years, it's time to vape and forget about tobacco all together.

  • Report this Comment On February 22, 2014, at 7:55 PM, LisaBelle wrote:

    What worries not only me, but hundreds of thousands of people is the lack of respectful attribution towards the thousands of small businesses that brought E-Cigarettes to such a profitable status as to be picked up on by huge corporations. These small businesses have driven the industry and I hope they will remain permanently viable and able to continue contributing to what this article states, that it is a win win for all or should be. Many jobs and small businesses are thriving and growing and should not be dominated and driven out, as the article says! Please visit some online E-Cigarettes stores that have been extremely professional and responsible. I don't give that same critique to businesses that have Billions of dollars and graveyards full of profit makers.

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Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

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