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Lorillard Inc. (LO), Altria Group Inc (MO): E-Cigs Could Help Reverse The Decline

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Cigarettes can kill you. They can give you cancer, make you spend all your money, and force you to smell bad. But, this little invention may be able to shift this type of public sentiment toward cigarettes to a more light-hearted one.

E-cigs, aka electronic cigarettes, vaporize a liquid that contains nicotine, an assortment of flavors, and propylene glycol (some companies are starting to offer more glycerin solutions as well). This simulates the act of smoking, while enabling you to emit only water vapor, which is less dangerous for your lungs. While this isn’t as healthy as not smoking, it still dramatically reduces the negative side effects of smoking.

Big tobacco

The growth in the e-cig industry has been large, big enough to prompt Lorillard Inc. (NYSE:LO) to buy out Blu Cigs, one of the bigger e-cig companies, for $135 million. Greater distribution of these e-cigs enabled Lorillard Inc. (NYSE:LO) to get $57 million in revenue from e-cig sales in the first quarter.

In 2011, the U.S. e-cig industry was estimated to be worth $500 million per year. Better distribution, more marketing, and a possible change in the social stigma toward smoking (in regards to e-cigs) could easily push this industry to be worth $1 billion within a few years. This pales in comparison to the $100 billion traditional U.S. cigarette industry, but e-cigs have a lot of room to grow, as they appeal to those who also don’t smoke cigarettes.

Altria Group Inc (NYSE:MO) has also stated its intentions to get into the e-cig business. This is huge, because Altria Group Inc (NYSE:MO)’s subsidiary, Philip Morris International Inc. (NYSE:PM), makes the most popular brand of cigarettes in the world, Marlboro. Altria Group Inc (NYSE:MO) said in it latest earnings call that it would provide an update in June on its future e-cig business, and that sales would most likely start in the second half of 2013.

The long slide and taxes

In the U.S., cigarette sales have been falling for the past four decades. Back in 1960, roughly 50% of Americans smoked cigarettes. Now only 18.5% of Americans smoke cigarettes, and it looks like the trend will keep pushing volume lower for some time. Altria Group Inc (NYSE:MO)’s total sales volume fell 5.2% in the U.S. last quarter (year-over-year), Reynolds saw a 5.6% decline when you adjust for the shorter quarter, and Lorillard Inc. (NYSE:LO) fell 2.3%. E-cigs are the only “cigarettes” seeing volume growth.

Cigarette companies like Altria Group Inc (NYSE:MO), Lorillard Inc. (NYSE:LO), and Reynolds American, Inc. (NYSE:RAI) have seen continuous volume declines as less Americans pick up smoking, and in order to replace this they have raised prices.

But, this may get harder to do, with Obama wanting to increase taxes on cigarettes, yet again. In 2009, there was a 9% drop in volume due to the recession and federal cigarette taxes increasing from $0.39 per pack to $1.01 per pack. This was to fund the State Children’s Health Insurance Program.

Now, the President wants to increase taxes on cigarettes to $1.95 per pack, which will make it much harder for these players to increase prices to compensate for volume declines. This makes it more important for these companies to grow somewhere else.

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