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A Hedged Play on the Booming Electronic Cigarette Market

Rupert Hargreaves
January 6, 2014

Once described as the most disruptive technology of the century (or at least the most disruptive to the tobacco industry), electronic cigarettes have proven to be one of the most successful products to hit the market in the past few years. Indeed, industry behemoths like Reynolds AmericanAltria (NYSE: MO) and Lorillard (NYSE: LO) have been falling all over themselves in attempts to get their own electronic cigarette products to market. While these tobacco industry giants fight it out, Universal Corp (NYSE: UVV), a major supplier of tobacco to the industry, has hedged its bets.

You see, Universal's subsidiary Virginia Tobacco Company has joined with Avoca, one of the world's premier botanical extraction companies, to form AmeriNic. AmeriNic's goal is to produce liquid nicotine for the electronic cigarette industry. The company is focusing on producing high quality, United States Pharmacopeia, or USP, grade liquid nicotine using fully traceable and compliant tobaccos.

This partnership is a really exciting endeavor for Universal. Expansion into electronic cigarettes opens up a huge new market for the company, which has traditionally been a standard tobacco supplier. Some might say that this diversification is essential for Universal to survive as the number of cigarettes consumed around the world declines.

However, as of yet Universal is not coming under pressure from the global decline in cigarette consumption, and this drive into the e-cig business should only boost the company's bottom line. Actually, Universal is spending to boost its tobacco output (which you can read more about here), as well as driving into the liquid nicotine space.

Showing signs of maturing
While Universal is hedging its bets and producing key ingredients for e-cigs, big tobacco companies are aggressively fighting it out for share of the e-cig market -- someth