Reynolds American, Inc. (RAI), Lorillard Inc. (LO), Altria Group Inc (MO): Can E-Cigarettes Be a Life Saver for Tobacco Companies?

Altria Group Inc (NYSE:MO)’s share price has surged 6.7%, highlighting that tobacco companies are far from dead. The company has a valuation similar to Lorillard Inc. (NYSE:LO), as it is trading at a 16.5 times P/E ratio, which is in line with the industry, and has a PEG ratio of 2.1 times. Its return on assets is lower than the industry average and stands at 11.5 times, but it has an attractive return on equity of 122 times, the highest of the peer group. Growth prospects for Altria Group Inc (NYSE:MO) seem bright with the development of its own e-cigarette device, and this is a good opportunity to channel that growth.

Possible obstacles: the feared regulation

It first started as a niche product, but as sales are increased, it drove the attention of the media and possible regulatory measures. This could be a problem for these companies as this could lead to taxation and other regulatory measures that could hurt sales margins. Currently, the industry is in a grey area in which there are no strict regulations, but a mild guidance from the U.S. Food and Drug Administration. However, some states have banned the sale of this product to minors as well as the use of e-cigarettes indoors (New Jersey, North Dakota and Utah).

If regulated and taxed, this could make it very difficult for consumers to adopt the new product, as prices will be nearer to traditional cigarettes. But, be aware of this market as tobacco companies have huge lobby maneuvers that can delay new regulatory measures.

The outlook

The e-cigarette market is consolidating as many big brands and manufacturers are betting their stakes for future growth. Sean Parker, the Sillicon Valley entrepreneur who co-founded the music sharing site, Napster, and a group of hedge funds are investing $75 million in an e-cigarette manufacturer called NJOY, and this news has renewed the attention in this sector. Companies are trying to get profits before new regulatory schemes are established, and the outlook for this market is massive: about one of five Americans smokes traditional cigarettes.

The article Can E-Cigarettes Be a Life Saver for Tobacco Companies? originally appeared on Fool.com and is written by Vanina Egea.

Vanina Egea has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vanina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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