Lorillard Inc. (LO), Reynolds American, Inc. (RAI): Investors Must Be Careful in the Hot New E-Cig Market

All of these factors point to one conclusion: Big tobacco has the ability to lock out smaller competitors. The CEO of yet another small e-cig producer, Logic Technology, states: “We’re hoping they don’t tell their customers, ‘If you want to carry our cigarettes, make sure you have our e-cigs.’ ”

However, with such a huge amount of choice hitting the market, underhanded tactics like this may start to take hold.

Faster growth
In the past two months alone, Altria and Reynolds American, Inc. (NYSE:RAI) have started the roll-out of e-cig brands: Altria with the MarkTen e-cigs and Reynolds American, Inc. (NYSE:RAI) with Vuse — both on the back foot of Lorillard Inc. (NYSE:LO).

But it’s not just e-cigs. Sales of existing smokeless products notched high single- to double-digit growth as Americans puffed on fewer cigarettes and other traditional smoking-tobacco products.

Reynolds American, Inc. (NYSE:RAI) leads the U.S. smokeless-tobacco market when it comes to snuff, so the company is well placed to break into other smokeless markets. Indeed, Reynolds American, Inc. (NYSE:RAI)’ adjusted operating income from cigarettes sank 2.2% in 2012 while earnings from snus advanced 10%.

The company’s key brand is Camel snuff, which accounts for 81% of the $175 million United States snus market. The closest competitors are Altria’s Marlboro and Skoal brands. What’s more, according to leading tobacco company Swedish Match, the U.S. snus market has grown at a rate of 5% annually for the past five years and this is expected to continue — cigarette consumption is expected to continue declining, however.

Foolish summary
All in all, e-cigs may be one of the fastest-growing and most disruptive technologies to hit the market this year. With so much competition now hitting the market, however, it could be wise to stand back and only back the winners — when they emerge.

The article Investors Must Be Careful in the Hot New E-Cig Market originally appeared on Fool.com and is written by Rupert Hargreaves.

Fool contributor Rupert Hargreaves owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned.

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