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Summary

  • The e-cig industry has grown from $1.5 billion to $3 billion in the last two years and Vapor corp offers pure play exposure.
  • Ryan Kavananaugh, a kingpin in the entertainment industry, is joining the board and brings a wealth of contacts and marketing know how.
  • The chance of federal or state regulation and cigarette companies entering the e-cig industry are major risks.

Investment Thesis

Vapor Corp. (VPCO: OTCBB: $7.50) is a leading player in the nascent e-cigarette industry. The e-cigarette industry could grow at 40% per year over the next decade due to increased adoption driven by a number of trends, including legality, social acceptability, health reasons, cost effectiveness, increased awareness and increased variety.

Vapor Corp. has the third largest retail presence behind Blu and NJOY. The company's products are in over 60,000 retail outlets in the United States. Vapor Corp.'s largest competitors Blu and NJOY have a retail presence of over 136,000 stores and 80,000 retail outlets, respectively. Retail presence is a key metric to determine winners and losers in the industry as shelf space is a key barrier to entry.

Vapor Corp.'s products provide superior value on a price per puff metric to its e-cigarette competitors and traditional cigarettes.

In addition to the e-cigarette opportunity, Vapor Corp.'s vaporizer product is compatible with marijuana, opening a huge additional market for the company. Only one of Vapor Corp's competitors offer a vaporizer product meaning there is limited competition in the space.

Vapor Corp. is undervalued. Recent acquisitions in the industry have been on an average EV/Sales multiple of 3.2x. Given the projected growth in the industry and Vapor Corp.'s strong competitive position, the company could see revenues triple over the next 2 years from $26 million in 2013 to $75 million in 2015. Placing the 3.2x EV/Sales on projected 2015 revenues, Vapor Corp.'s EV should be $240 million or an annualized return of 44% over the next 2 years, leading to a 2015 Target Price of $15.65.

Company Description

Vapor Corp. is a leading U.S. based electronic cigarette company, whose brands include Fifty-One®, Krave®, VaporX®, EZ Smoker®, Alternacig®, Green Puffer®, Americig®, Fumare™, Hookah Stix® and Smoke Star®. The company also design and develop private label brands for its distribution customers. Vapor's electronic cigarettes and accessories are available online and through over 60,000 retail locations throughout the United States and Canada.

Vapor Corp. offer disposable products, rechargeable products and vapor products.

Disposable e-cigarettes feature a one-piece construction housing all the components. A consumer uses the e-cigarette until he/she consume the nicotine or nicotine free solution. Disposable e-cigarettes come in all flavors.

Vapor Corp. sells disposable e-cigarettes in King Size, Classic Size, and Standard Size, under the Krave® Brand. The King Size disposable e-cigarette lasts around 160 puffs just under the 200 puffs in a pack of traditional cigarettes. The King Size e-cigarette is the same size and has the same feel as a traditional cigarette. Online, Vapor Corp. sells the King Size as a single disposable cigarette for $6.95, in a two pack for $9.99 or in a five pack of $20.95. Vapor Corp. sells a single Classic Size for $6.95 and it provides the consumer with 300 puffs. The Standard Size, despite its name, lasts longer than the King Size and Classic Size providing the consumer with approximately 500 puffs. Vapor Corp. sells the Standard Size as a single Standard Size e-cigarette for $8.99. Disposable e-cigarettes are all 1.8% nicotine and come in various flavors; including tobacco, menthol, wild cherry, vanilla, sour apple, chocolate, and grape. Vapor Corp. also sells an e-cigar under the Fifty-One® brand. The e-cigar lasts about 1,500 puffs and sells online for $29.95.

The table above compares Vapor Corp.'s disposable online offer with its competitors. Vapor Corp.'s and Blu's offers are very similar with a price per puff very close. Vapor Corp. comes in at an initial lower price point that may attract more users. Both Vapor Corp.'s and Blu's disposable products are at roughly a 20% discount to a traditional cigarette price per puff while, NJOY's product is priced at a 15% premium to traditional cigarettes and a 35% premium to Vapor Corp. and Blu. Other competitors, such as Mistic and Victory, did not have disposables e-cigarettes available for purchase online. Vapor Corp. had the largest selection of disposable e-cigarettes of any competitor, in both product price points and flavors.

Rechargeable e-cigarettes feature a rechargeable battery and replaceable cartridge. When the consumer finishes the solution, he/she can replace the cartridge. Vapor Corp. sells its rechargeable e-cigarette under multiple brands. The rechargeable starter kit comes with a rechargeable battery, a USB charger, a tobacco filter, a menthol filter and a carrying case. Vapor Corp. sells the starter kit online for $20.95. Vapor Corp. also sells refill cartridges in packs of five for $10.95. One cartridge is equal to 160 puffs. The replaceable cartridge comes in tobacco and menthol.

The table above compares the rechargeable product offerings of different competitors based on their websites and include the purchase of the initial hardware and five additional refills. Vapor Corp. is the best value in this segment at 2.28 cents per puff, a 24% discount to its closest peer and 30% discount to a traditional cigarette. Blu product is the most expensive at 6.40 cents per puff.

(click to enlarge)

Vaporizers feature a tank or chamber, a heating element and a battery. The vaporizer user fills the tank with e-liquid or the chamber with dry herb or leaf. The consumer can recharge the vaporizer's battery and refill the tank and chamber. Vapor Corp. sells the e-vaporizers under the VaporX® brand at a range of price points with prices starting at $20.95 and reaching $120.95 for the Extreme Vaporizer. Consumers refill the vaporizer with liquid in bottles. Each 10mL replacement bottle is $8.95 and is equivalent to 15 packs of cigarettes. The replacement bottles come in many flavors; including tobacco, menthol, vanilla, cherry, chocolate, grape, sour apple, blueberry, strawberry, banana, latte, and energy. Consumers can also use VaporX® for marijuana. The only large competitor with a vaporizer is NJOY.

Management and Board

Kevin Frija, Chief Executive Officer and Director

Kevin Frija has served as our Chief Executive Officer since June 9, 2009 and was the sole member of the Board of Directors from June 9, 2009 until May 9, 2013. From June 2009 until February 19, 2013, Mr. Frija served as our President. He has over 20 years of experience, particularly in the areas of sourcing, manufacturing, supply chain management, marketing, advertising, and licensing. Prior to Mr. Frija's involvement in Vapor Corp, he operated Ingear, Inc., a swim and resort wear company based in Miami, Florida. On a limited basis, Mr. Frija assists Ingear in a managerial capacity.

Source: Morningstar Advisor

Jeffrey Holman, President and Director

Jeffrey Holman has been President of Vapor Corp since February 19, 2013. Mr. Holman has been a member of the Board of Directors since May 9, 2013 and has served as a member of the Board of Directors of our operating subsidiary Smoke Anywhere USA, Inc. since its inception on March 24, 2008. Mr. Holman has been the President of Jeffrey E. Holman & Associates, P.A., a South Florida Based law firm, since 1998. He has also been a Partner in Holman, Cohen & Valencia since the year 2000.

Source: Morningstar Advisor

Harlan Press, Chief Financial Officer

Harlan Press has been our Chief Financial Officer since February 29, 2012. Prior to being appointed Chief Financial Officer, Mr. Press served as a consultant to the company since August 2011. Mr. Press has worked as an independent consultant from May 2009 through February 2012 and January 2007 through December 2007. From December 2007 through April 2009, Mr. Press was the Chief Financial Officer of Solar Cosmetics Labs, Inc., a privately held company, which filed for Chapter 11 bankruptcy protection in May 2008 and liquidated in April 2009 under the federal bankruptcy laws. From August 2005 through December 2006, Mr. Press was a director of Adsouth Partners, Inc. and from April 1994 through March 2006, Mr. Press worked at Concord Camera Corp. in various capacities, including as Vice President, Treasurer, and Principal Financial Officer. Mr. Press is a Certified Public Accountant, holds a Bachelor of Science degree from Syracuse University, is a member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants, and is a Chartered Global Management Accountant.

Source: Company 10-K

E-Cigarettes Key Trends

A recent Center for Disease Control and Prevention press release found that in 2011 nearly 1 in 5 adult cigarette smokers tried e-cigarettes. This number is up 10% from 2010. Currently about 6% of all adults have tried vapor smoking, which is nearly double the estimate in 2010. A number of trends including legality, social acceptability, health reasons, cost effectiveness, increased awareness, and increased variety are driving the growing adoption of e-cigarettes.

While legislators banned tobacco cigarettes in public places across the nation, e-cigarettes are not as regulated. Some cities such as New York, Chicago, and Long Beach have placed similar prohibitions on the use of e-cigarettes to the prohibition placed on traditional cigarettes, but overall consumers can use e-cigarettes in the vast majority of cities. This creates significant demand for e-cigarettes, particularly in cold weather locations, as smokers can get their nicotine fix indoors. E-cigarette industry participants expect a nationwide age restrictions and a restriction on TV advertising. The restriction on TV advertising would be a benefit for Vapor Corp. as the larger players are currently advertising on TV; while, Vapor Corp. does not have the scale or marketing budget to advertise. A ban would level the playing field.

E-cigarettes are more socially acceptable than traditional cigarettes. For many, the unacceptable part of traditional cigarettes is smoke and the smell of the smoke. Unlike traditional cigarettes, e-cigarettes do not produce smoke. This leads to a lower level of intrusion and a higher level of social acceptance. A Harris Interactive survey the 2014 American E-Cigarette Etiquette Survey confirmed the social acceptance with nearly 63% of Americans stating someone using an e-cigarette near them would not bother them.

E-cigarettes are less of a health risk than traditional cigarettes. With traditional cigarettes, smokers are inhaling a number of additives that cause cancer including tar, benzene, formaldehyde, arsenic, ammonia, and carbon monoxide. Nicotine itself does not cause cancer. It is a stimulant similar to caffeine. Stimulants increase your heart rate, speeds up other bodily functions and constrict blood vessels. Both are highly addictive and can cause severe withdrawal symptoms making it difficult to quit.

E-cigarettes are more effective than patches or gum at helping smokers stop quitting as it replicates the process of smoking. The process of smoking becomes almost as addictive as nicotine, with some estimating 60-70% of the addiction is the process of placing a cigarette to your lips. The patch carries other disadvantages such as potential visibility, side effects, and inability of the user to control the dosage. A study conducted by the National Institute for Health Innovation at the University of Auckland showed the percentage of e-cigarette quitters was higher than nicotine patches and placebo at 7.3%, 5.8% and 4.1%, respectively. The study also showed relapsed e-cigarette users smoked less. Of the volunteers in the e-cigarette group, 57% halved their daily cigarette use by the end of the 6 months, compared with only 41% in the nicotine patches group and 45% in the placebo group. According to the Center for Disease Control in 2011, 68.9% of adult smokers wanted to quit smoking and 42.7% attempted to quit. With such a high desire to quit, the effectiveness of e-cigarettes and the similarities to the smoking process, e-cigarettes are an attractive option to quit or decrease their usage. The total market for smoking cessation products such as nicotine patches and gum is estimated at $835 million.

E-cigarettes are also cheaper than traditional cigarettes. As illustrated above, Vapor Corp. disposable King size product is about 20% cheaper per puff than a traditional cigarette at an average US cigarette price of $6.50 per pack. The Tobacco Atlas places the average pack of cigarettes at $6.36 in the U.S. confirm the $6.50 price per pack. According to Vizualstatistix, in 2012, the average U.S. smoker smoked 19.1 cigarettes a day. At a consumption rate of 20 cigarettes per day, the average smoker in the U.S. saves $478 per year with e-cigarettes. The disposable King size e-cigarette is the most expensive product over a year. Savings would be much more if the consumer purchased a rechargeable product or a vaporizer product. On a conservative measure a smoker would save a minimum of 20% per year switching to e-cigarettes.

E-cigarettes are gaining increased awareness as e-cigarette manufactures NJOY and Blu are advertising heavily. NJOY had a commercial during the Super Bowl and Blu enlisted celebrities Stephen Dorff and Jenny McCarthy to promote their products. Legislators banned tobacco advertising from television in 1970 and banned from outdoor advertising in 1997, giving a significant advantage to e-cigarettes.

To increase appeal, e-cigarettes are available in a wide variety of flavors. This should entice social smokers. Regulators banned tobacco companies from adding any flavors to traditional cigarettes.

The growing adoption of e-cigarettes is driven by a number of trends including: legality, social acceptability, health reasons, cost effectiveness, increased awareness, and increased variety, should continue.

Competitive Landscape

There are more than 200 e-cigarette producers. The number of competitors is decreasing but competitive pressures are increasing as the large tobacco companies are entering the fray. Lorillard (NYSE:LO), the third largest tobacco company and maker of Newport cigarettes was the first to enter the e-cigarette market with its April 2012 purchase of Blu. In February 2014, Altria (NYSE:MO), the largest U.S. tobacco company and maker of Marlboro, acquired Green Smoke to enter the e-cigarette market. Reynolds American (NYSE:RAI), the second largest U.S. tobacco company and maker of Camel, entered the market in 2013 with their own e-cigarette offering, Vuse.

The increased competition from larger players will lead to an eventual consolidation in the market with 5-10 players at the end of the industry shakeout, as economies of scale will be present in the market. Vapor Corp believes there will be 3-4 large players and 6-7 second tier players, with the three large tobacco players and one other player in the top-tier. The large fixed costs associated with marketing and potential regulatory costs will likely eliminate smaller players. Marketing is particularly important at the early stages of an industry life cycle when no brand has established itself as the clear leader and all companies are trying to increase brand awareness. Vapor Corp mentions e-cigarettes are seeing 60% repeat business pointing to a strong brand loyalty similar to the tobacco industry.

Limited shelf space at retailers creates another important market inefficiency, as the FDA may ban online sales of e-cigarettes. The access to retail outlets will be one of the key determinants of survival. The large tobacco companies will gain access given their relationships from traditional tobacco but for smaller companies this will be important to monitor. As discussed earlier, Lorillard's Blu has the largest retail presence in over 136,000 retail outlets. NJOY is in over 80,000 retail outlets. Vapor Corporations products are available in over 60,000 retail outlets. Mistic sells its e-cigarettes in over 40,000 stores nationwide. The recent merger between Victory and Finn increased the combined entities retail presence to over 50,000 stores nationwide. Logic's e-cigarettes are in 10,000 retail outlets.

Market Size

Electronic cigarettes' sales grew from almost nothing five years ago, to roughly $500 million in 2012 and over $1.5 billion in 2013. E-cigarettes presence is illustrated by 75% of tobacco retailers carrying at least one e-cigarette brand. The growth in the market will continue. Wells Fargo and Bloomberg Industries estimate e-cigarettes sales will surpass traditional cigarettes within the next decade. The U.S. tobacco industry is a $90 billion industry. The most optimistic scenario puts the U.S. e-cigarette market at over $80 billion in ten years, representing a 47% compound annual growth rate and the global opportunity at $300 billion in 10 years. Assuming no-growth in the overall tobacco market size and 50% cannibalization of tobacco cigarettes sales, e-cigarettes' sales could reach $45 billion in 10 years, representing almost 40% growth per year. Using a more conservative estimate of 25% of total traditional cigarette sales, the e-cigarette industry could reach $20 billion over the next decade or a compound annual growth rate of over 30% per year for the next decade.

A recent study by Linarch Research and Citi placed the E-cigarette market size at $1 billion at the end of 2012. They estimate the market size will triple to $3.2 billion by the end of 2015.

Why Buy Now?

In October 2013, the company completed a $10 million private placement of common stock. According to Vapor Corp., 60% of e-cigarette buyers are repeat buyers, pointing to a brand loyalty similar to tobacco industry, where customers are extremely fussy about which cigarettes they smoke. First mover advantage and locking in customers are crucial to having a strong competitive position. Any capital to aid this goal is crucial.

On December 20, 2013, Family Dollar (NYSE:FDO) stores across the U.S. started selling KRAVE® KING brand of disposable e-cigarette products. Vapor's products are now in more than 60,000 retail outlets in the U.S. and Canada. As mentioned above, the company's store count is one of the largest in the industry. Distribution and the ability to gain shelf space is a key barrier to entry in the industry and Vapor Corp. being one of the leaders in the industry, with its products in more than 60,000 retail outlet, gives them a very strong competitive position.

On December 23, 2013, the company announced a 1-for-5 reverse stock split to satisfy the minimum bid price requirement in order to seek listing of the common stock on The NASDAQ Capital Market. The company expects an up listing to the NASDAQ Capital Market by the middle of 2014. This will increase the number of investors able to invest in Vapor Corp.

On January 7, 2014, Vapor Corp. unveiled the e-cigarette industry's first biometric technology. According to CEO Kevin Frija:

"The next trend in alternative smoking devices is the personalized vaporizer that incorporates the technology that we expect from our high-end tech devices. By incorporating this biometric user identity technology into the VaporX personal vaporizer, the door is opened to many customizable features. The fingerprint lock security allows customers to protect their device from use by another individual and this same technology will lead to the development of additional features and controls."

On February 6, 2014, Vapor Corp announced Ryan Kavanaugh will join as member of the Board of Directors and Strategic Advisor five days after the company files its 2014 Annual Report. Ryan Kavanaugh is an investor and principal of Knight Global, a family office. Mr. Kavanaugh is the Founder and Chief Executive Officer of Relativity, a next-generation media company engaged in multiple aspects of entertainment; including film production, financing and distribution, television, sports management, music publishing and digital media.

Mr. Kavanaugh is a highly successful producer and global expert in film finance. Under his leadership, Relativity has produced, distributed, or structured financing for more than 200 motion pictures generating more than $17 billion in worldwide box-office revenue and earning 60 Oscar® nominations.

Kavanaugh began his entertainment industry career as the architect of innovative slate-financing arrangements for a number of major studios. He designed feature-film funding structures for Sony, Universal, Warner Bros., and others, introducing more than $10 billion in capital to the sector. Relativity evolved from a finance and production company into a full-fledged movie studio after Kavanaugh led its acquisition of Overture Films' marketing and distribution operations in 2010. He further strengthened the studio's distribution network by negotiating a first-of-its-kind television deal with Netflix (NASDAQ:NFLX), forging a strategic partnership with Sir Richard Branson's Virgin Mobile and Virgin Produced and overseeing the studio's aggressive expansion into China.

On February 26, 2014, Vapor Corp. announced its full year 2014 results. The company reported strong results with revenues growing by 22%. The company was profitable with a huge turnaround in profitability. 2013 Operating income was $276,561, compared with an operating loss of ($2,386,913) for 2012. Net income for 2013 was $801,352 compared with a net loss of ($1,920,972) for 2012.

What is this opportunity worth?

In addition to the acquisitions listed above, Imperial Tobacco, Europe's second largest tobacco company and maker of Davidoff cigarettes purchased Dragonite International in September 2013. In October 2013, Lorillard increased its e-cigarette offering and geographical presence with its acquisition of European e-cigarette SKYCIG.

(click to enlarge)

Imperial's acquisition of Dragonite International was an IP acquisition. Neither Victory nor VAPESTICK's previous owners provided revenue figures. With the information available the average Enterprise Value/Sales multiple was 3.2x.

Given the recent acquisitions in the industry have been on an average EV/Sales multiple of 3.2x, and given the projected growth in the industry and Vapor Corp.'s strong competitive position, it could see revenues triple over the next 2 years from $26 million in 2013 to $75 million in 2015. Placing the 3.2x EV/Sales on projected 2015 revenues, Vapor Corp.'s EV should be $240 million or an annualized return of 44% over the next 2 years.

Technical Analysis by Harry Boxer (TheTechTrader.com)

Vapor Corp. moved from under $2 to near $10 from May to December 2013. Over the flowing 3 months, it pulled back to test the $5.75 level near the major rising channel bottom support and last week bounced off that support to get back to just under $8. The 15-month rising channel and solid technicals indicate higher levels may be forth coming. First, Vapor Corp.'s stock price needs to retest and take out of that $9.75-10 resistance zone. If that occurs, our technical price objectives are set at $12.50, $15.50-$16, and then $19-$20!

Risks

The e-cigarette industry could face increasing regulation. Regulators have clamped down on e-cigarette use in some areas of the country, placing restrictions on e-cigarettes similar to the restrictions on traditional cigarettes.

As mentioned above, the e-cigarette industry is extremely competitive. Vapor Corp. is competing against large tobacco companies with very deep pockets and strong political connections. Vapor Corp. has a strong competitive position based on its retail presence and product offering, the most diverse of any e-cigarette company.

To increase retail network and brand presence will take capital, Vapor Corp. may need additional funding, which could dilute existing shareholders.

Vapor Corp. currently trades on the OTC market and its stock has limited liquidity. There may be an impact to price when making large purchases and sales. The expectation of listing on NASDAQ will help.

Conclusion

Vapor Corp. is a leading player in the nascent e-cigarette industry. The e-cigarette industry could grow at 40% per year over the next decade due to increased adoption driven by a number of trends including: legality, social acceptability, health reasons, cost effectiveness, increased awareness, and increased variety.

Vapor Corp. has the third largest retail presence behind Blu and NJOY. The company's products are in over 60,000 retail outlets in the United States compared to Blu's store count of over 136,000 and NJOY in over 80,000 retail outlets. Retail presence is a key metric to determine winners and losers in the industry as shelf space is a key barrier to entry.

Vapor Corp.'s products provide superior value on a price per puff metric to its e-cigarette competitors and traditional cigarettes.

In addition to the e-cigarette opportunity, Vapor Corp.'s vaporizer product is compatible with marijuana, opening a huge additional market for the company. Only one of Vapor Corp.'s competitors offer a vaporizer product so there is limited competition in the space.

Vapor Corp. is undervalued. Recent acquisitions in the industry have been on an average EV/Sales multiple of 3.2x. Given the projected growth in the industry and Vapor Corp.'s strong competitive position, it could see revenues triple over the next 2 years from $26 million in 2013 to $75 million in 2015. Placing the 3.2x EV/Sales on projected 2015 revenues, Vapor Corp.'s EV should be $240 million or an annualized return of 44% over the next 2 years leading to a 2015 Target Price of $15.65.

Source: Vapor Corp.: A Pure Play On The Smoking E-Cigarette Industry

Additional disclosure: I was assisted with this article by my associate Marc Melendez