The Game-Changer Affecting This $80 Billion Industry

Karen Canella's picture

Thursday, September 26, 2013 - 10:00am

by Karen Canella

Death and taxes aren't the only sure bets in life. You can always count on:

  • Kids looking for the newest, coolest fad to explore.
  • Adults who want to be healthy but would rather take a shortcut for their clean bill.
  • Companies looking to exploit both.

Add a component of addiction to this scenario, and you get a multi-billion-dollar bonanza of a market in e-cigarettes.

The decade-old industry began gaining traction in 2008, drawing $20 million that year, $500 million in 2012, and it's expected to reach $1.7 billion in 2013. Only a fifth of the more than 45 million smokers in the United States has tried them, so the effect of e-cigs on the $80 billion tobacco industry is only beginning to be realized.

Of course, the difference between the two is that you "vape" e-cigarettes, not smoke or inhale them. The battery-powered tubelike devices release water vapor laced with nicotine housed in a cartridge. Users then inhale the vapor as they would the smoke from a combustible cigarette.

E-cigs are marketed as healthier or not as bad for users, but everyone from federal agencies and anti-smoking advocates to doctors, hospitals and educators are putting up their dukes against e-cig companies.

Here are a few pros and cons:

Con: The Food and Drug Administration (FDA) says one of the ingredients in e-cigarette vapor is polyethylene glycol, the chemical used for theatrical smoke. It is also an FDA-approved food additive commonly found in deodorants, moisturizers and toothpaste.

Pro: According to e-cigarette merchant, heavy smokers can save more than $1,000 a year by switching to e-cigs.

Con: Many e-cigs also deliver nicotine, so some people may stay addicted.

Pro: They are non-flammable.

Con: Studies showed that at least two brands of e-cigs revealed detectible levels of known carcinogens, such as diethylene glycol, an ingredient in antifreeze, as well as small amounts of tobacco-specific nitrosamines.

Pro: E-cigs come in many flavors and are easily found in retail outlets and on the Internet.

  Flickr/Lindsay Fox  
  Only a fifth of the more than 45 million smokers in the United States has tried them, so the effect of e-cigs on the $80 billion tobacco industry is only beginning to be realized.  

So, with the backing of celebrities and stores wanting to sell them -- half the states even do to minors -- a handful of companies stand to profit from the e-cig generation. Let's start with tobacco row.

Altria Group (NYSE: MO), the world's biggest tobacco company and parent company of Philip Morris USA, was the last one of the big three to jump in, seeking future sales growth because of the expected decline in cigarette smokers. It generates a healthy 5.4% dividend and is up 68% over the past five years.

Wells Fargo estimates that No. 2 Reynolds American (NYSE: RAI) will have $4 billion in revenue from e-cigs in 2021, compared with $3.9 billion from conventional cigarettes. RAI offers a 5% dividend and is up 16% this year.

Lorillard (NYSE: LO), maker of Newport cigarettes, is the third-biggest and oldest U.S. tobacco company. It acquired electronic-cigarette maker Blu eCigs for $135 million in 2012 and racked up first-quarter sales of $57 million in 2013. The brand is already in 80,000 stores. LO offers a 5.1% dividend. 

Finally, Vapor Corp. (OTC: VPCO) is the only pure e-cig play among the group. Although it reported record net sales of $21.4 million in 2012, an increase of 33.6% year over year, it's the riskiest of the bunch. It has nearly quadrupled from $0.25 in early January to nearly $1.

Risks to consider: With Vapor, you need to be aware that it could get squeezed out by Big Tobacco, plus it trades on the pink sheets, so volatility is to be expected. Think small in terms of investing.

Actions to Take --> You can't go wrong putting money to work in the top three U.S. tobacco companies. They have all fared well over time, and e-cigs will just add revenue or at least any lost from people quitting tobacco.

P.S. If you think the e-cigarette trend will be as big as we do, then wait until you find out about the other huge opportunities our research team has uncovered. Our previous predictions have returned up to 310% gains in a year. To hear our latest, including how Apple's next breakthrough could kill the traditional bank, click here.

Karen Canella does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.