Electronic cigarettes are gaining popularity as they have come as a boon to smokers looking to quit smoking. The device, E-Cig, was first introduced by a Chinese pharmacist named Hon Lik in 1984. Ever since the inception of this device, a new market was created by tobacco companies engaged in the manufacturing of cigarettes. Companies like Lorillard (NYSE:LO) and Philip Morris International (NYSE:PM) are embracing this device to power their growth.
Future of traditional cigarettes
With increasing health awareness programs and government policies of banning smoking in public areas affecting sales of conventional cigarettes, cigarette manufacturing companies have seen an impact on their financials. There is a paradigm shift with leading cigarette manufacturers like Lorillard and Philip Morris International now concentrating on E-Cigs.
The opportunity here
The market for E-Cigs is huge. Bloomberg estimates that E-Cigs sales will surpass the sale of traditional cigarettes by the mid of this century.
Wells Fargo projects E-Cigs retail sales to exceed $10 billion by 2017. Currently, the E-Cigs business is projected at around $2 billion, which is a tiny fraction of the traditional cigarette business of $800 billion, but the trend is changing here as mentioned earlier.
Lorillard made its move in this emerging market by acquiring Blue Cigs in 2012 and became the first leading tobacco company to enter this market. Currently, Lorillard's stake in the U.S. retail market for E-Cigs is around 49%, making it the leader of this segment. This was not the only acquisition - the success story of E-Cigs inspired Lorillard to acquire another company known as Skycig. This strategic move of acquiring Skycig increased its footprint in the U.K. E-Cigs market and also enhanced its global presence.
Not just Lorillard, but even other tobacco companies such as Philip Morris International also have plans to step into this territory. The company has officially announced that it will launch E-Cigs in 2014. Both these companies feel that E-Cigs will positively influence their top and bottom lines in the future.
E-Cigs contributing to Lorillard's revenue
E-Cigs have already started contributing for Lorillard. It recorded almost 3.4% of revenue from this category in the previous quarter out of a total of $5.2 billion. With E-Cigs still in the nascent stage, the future seems bright for Lorillard.
The rise in sales of the Blue E-Cigs brand is a result of various brand building activities conducted as a strategic marketing move by Lorillard. The benefits of these brand building activities can be seen in the last quarterly result.
With a strong distribution of 127,000 retail outlets, the launch of new brands and lower prices, along with rechargeable kits, Lorillard is in a great position to benefit from this market.
Philip Morris joining the race
Lorillard may be seeing an increase in revenue, but another leader in the same segment has a different story. The sales figures of Philip Morris are not so attractive in terms of growth as compared to Lorillard. Its volumes in the previous quarter decreased due to various international taxation policies. An increase in excise tax in countries like Russia and Philippines and tight marketing restrictions in Australia affected the sales of Philip Morris.
To address these concerns, in the latter half of the year, Philip Morris is all set to venture into the E-Cig business. It initially plans to introduce E-Cigs in various cities in the U.S. with plans for a national launch by 2015, after it has conducted all tests and experiments.
Also, a strategic alliance of Philip Morris with Altria Group will be focused on selling E-Cigs and smokeless products globally. With this partnership, Altria gets exclusive rights for the U.S. to sell alternative heated tobacco products manufactured by Philip Morris. In return Philip Morris gets exclusive global rights to sell E-Cigs manufactured by Altria.
Electronic cigarettes have a lot of advantages over traditional cigarettes. They are relatively healthier, cost effective and have a big market ahead of them as each smoker is a potential e-cigarette buyer. Hence, investors who are willing to cash in on this trend would do well by investing in either Philip Morris or Lorillard. Lorillard could be the preferred choice of most as the company already has its feet in this market while Philip Morris is just starting off, giving Lorillard an important headstart.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.