Should Altria Enter The E-Cigarette Market To Support Growth?

by Trefis Team
-1.10%
Downside
42.97
Market
42.50
Trefis
MO
Altria Group, Inc.
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Altria (NYSE:MO) is the largest cigarette manufacturer in the United States. The stock is a popular due to its high dividend yield, and the company’s strong brands such as Marlboro and L&M. However, there are a number of inherent risks in the U.S. cigarette industry which Altria investors should be wary of. These include the declining market for cigarettes in the country, rising excise duties and the threat of increased and stricter regulation from the government against the industry.

We believe that these risks are long-term and sticky in nature and that Altria will not be able to maintain the growth of its top line and dividend payout without entering into markets for alternative tobacco products. The company has already ventured into smokeless tobacco, and through its brand names Copenhagen and Skoal, has gained the top spot in the market for the products. It also recently launched a nicotine flavored lozenge under the brand name Verve. Here we examine Altria’s potential entry into the market for another alternative tobacco product, electronic cigarettes.

See our full analysis for Altria


What are e-cigarettes and what is the projected size of the market for these products?

Electronic cigarettes are nicotine-infused, battery heated tubes that create vapor instead of smoke. The primary selling point for these products over other tobacco alternatives is their close similarity to traditional cigarettes, compared to whom they are substantially less harmful. Further, these products are currently not subject to any regulation from the government or other authorities, and are thus priced at lower rates. E-cigarettes are thus touted as a potential long term replacement for cigarettes.

The market for e-cigarettes, which is currently around $300 million in size, may grow to over $1 billion over the next 3 years, according to some projections. This translates to an annual growth rate of almost 50% over the next 3 years. E-cigarettes have been around for a while, but we believe that the market could reach an inflection point in its growth and see much higher growth in the coming years.

Why does Altria need to enter this market?

Altria is currently the leader in U.S. cigarettes market but faces declining revenues and a shrinking user base due to the factors mentioned earlier. In 2011, the market size of cigarettes in the U.S. was around 270 billion units. We project a gradual decline over the course of our forecast period, with the market reaching 235 billion units by 2019. With the market for cigarettes declining, Altria is restricted to driving top line growth for the division through price increases, which is unsustainable.

Altria’s competitors, such as Lorillard and Reynold’s, have already embraced e-cigarettes and have entered the market through the acquisition of Blu cigs and the development of a computer chip based “digital” cigarette respectively. Altria, on the other hand, has yet to make a move and stands to lose out on what could be a highly lucrative and rapidly growing market if it does not act soon.

How will Altria enter the market?

There are several ways in which Altria can enter the e-cigarette market. One would be to acquire a well established e-cigarette maker in the US, similar to Lorillard’s acquisition of Blu ecigs. According to Wells Fargo analyst Bonnie Herzog, Altria may be looking to acquire NJOY, an e-cigarette maker with a 40% share of the U.S. e-cigarette market. On the other hand, the company could be looking at developing e-cigarette products in-house. Altria reported earlier this year that it has entered into a partnership with Okono A/S, an affiliates of Fertin Pharma A/S, to develop “innovative, non-combustible nicotine-containing products”.

We currently have a Trefis price estimate of $30 for Altria, which is about 10% below the market price.

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Altria Group, Inc. Logo
  • commented 1 years ago
  • tags: PM MO
  • In 2013, more and more people are turning to electronic cigarettes. I think that e-cigs really can help a smoker to quit smoking. Buy Electronic Cigarettes
    Altria Group, Inc. Logo
  • commented 1 years ago
  • tags: PM MO
  • I am a regular e-cigarette smoker and I just love to know new e-cig product launching in the market. At present I buy my e-cig accessories from Vapourmaniacs.com online store. They offer some amazing flavors of vaping but I always try any new launch at least once.
    Altria Group, Inc. Logo
  • commented 1 years ago
  • tags: PM MO
  • Its always good to see new electronic cigarette entering the market. Purely, because electronic cigarettes get more visibility and tobacco cigarette smokers become more aware of a healthier alternative within the market. - http://www.ecigator.net/
    Altria Group, Inc. Logo
  • commented 2 years ago
  • tags: PM MO
  • I love e cigarettes and use them almost every day.I used to smoke at least a pack a day and would always come home from my job smelling like a bar.My wife hated it and then she told me about the e cigarette and and I looked it up online and came across a site that detailed me about everything there is to know about e cigarettes.I didn't know that much at the time and now I know how to use them and I use my e cigs every day.I don't smell and I love them because you're only smoking out water vapor instead of all of the other junk that is in regular cigarettes.They're way healthier and save me tons of money,and especially in today's economy because of how expensive just one pack is.If you wanted to know more about e cigarettes and how to find deals and how they work then I highly suggest that you check this site out.
    http://electronic-cigaretts.org
    Altria Group, Inc. Logo
  • commented 2 years ago
  • tags: PM MO
  • A very important factor to consider when asking ‘where can I get an e cigarette' is the volume and quality of the smoke produced.
    Altria Group, Inc. Logo
  • commented 2 years ago
  • tags: PM MO
  • Blu has a retail share of approximately 8% (per Nielsen c-store data wk ending 11/24/12). NJOY also just launched a new product - NJOY King - that actually has the potential to convert even the most hardcore smokers. For the first time, smokers can get an e-cig that has the same weight, feel and flavor of a traditional cigarette.

    Will be interesting to see where the category goes! Regardless of the brand, Altria needs to strongly consider entering the category to protect their long term earnings. Not to mention, e-cig sales are not considering part of the Master Settlement Agreement. This means that not only are e-cigs a growing category, they also reflect added margin potential for big tobacco companies that are under constant pressure from taxation and MSA payments.
    Altria Group, Inc. Logo
  • commented 2 years ago
  • tags: PM MO
  • Let's put this safe not safe debate to an end. Obviously it's best not to smoke anything at all, but e-cigarettes are by far the lesser of two evils. Besides they can help you quit smoking, and I'm living proof among millions of other ex-smokers. And I don't mean switch to e-cigarettes, no, I mean quit smoking altogether, with the help of e-cigarettes as a buffer, check out my quit smoking blog: http://e-cigarette-review.net/beware-of-free-electronic-cigarette-scams/
    Altria Group, Inc. Logo
  • commented 2 years ago
  • tags: PM MO
  • That would be a great move for Altria to make (acquisition of NJOY). I never thought NJOY owned 40% market share. Where does Blu Cigs stand on that?

    Lindsay
    - http://ecigarettereviewed.com/