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Altria Can Still Smoke the E-Cig Competition

By Rich Duprey - Feb 5, 2014 at 8:35PM

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

To understand that the tobacco industry views the electronic cigarette market as its future, look no further than the latest acquisition by Altria ( MO 1.10% ) 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 ( LO.DL ) 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 ( 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 ( PM 1.02% ) 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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
$43.69 (1.10%) $0.47
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$88.74 (1.02%) $0.90
Reynolds American Inc. Stock Quote
Reynolds American Inc.
Lorillard, LLC Stock Quote
Lorillard, LLC

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