When we look at companies that have exposure to the cigarette manufacturing space, there has been little reason to get excited about growth prospects any time in recent memory. There has been almost no innovation in traditional paper cigarettes for as long as most investors can remember, and little reason to aggressively buy into those stocks with a real hope of achieving long-term growth. But the e-cigarette revolution has changed this and it makes sense to start looking at some of the companies best positioned to capitalize on these new trends as there are some critical implications here for specific stock sectors.
Of course, in this case it makes sense to consider the inner workings of both large and small cap companies -- and in the mergers and acquisitions that are taking place between these two classes. This is where we can find some of the best relationships and stock buys that are likely to gain from these trends. When looking at the numbers, there are some surprising statistics that can be found at both the foreign and domestic levels. “US sales numbers for small and large e-cigarette outlets came in at more than $1 billion last year,” said Sam Hadi at CloudCig. “This was much higher than industry analysts had initially expected and this is helping to prop some of the buzz that is now being seen in the sector.”
So, what does this mean for the broader industry trends? And which stocks should be watched as a means for determining the progress with which companies are able to capitalize on these improved prospects for sales numbers?
Industry Trends
Nearly 3% of the adults in the US have tried an e-cigarette, and this creates a broad new market for the companies that are manufacturing these new products. Approximately 2.5 million Americans have already made the full transition to the e-cigarette alternative and this suggests that we will continue to see sales increases for the companies that are making the shift along with a changing consumer base. The best indication of the validity of these trends can be seen in the fact that major names like Altria (MO) are now making major moves to acquire smaller industry innovators that will can give a bigger company an edge in developing new products for these markets.
Well-Positioned Stocks
In addition to Altria Group, (MO), it makes sense to watch for strategy changes in companies like British American Tobacco (BTI) and Lorillard (LO). Lorillard was one of the earliest examples of a major cigarette brand that gained sizable exposure to these markets, so the level of success or failure that is seen at Lorillard will be a strong indication of where the industry as a whole is headed. For those looking to gain exposure in global markets (where similar sales trends are being seen), one solid choice can be seen in British American Tobacco which owns 42% of the outstanding stock in Reynolds American Inc, (RAI) in addition to its exposure to European markets. Recent decisions at these companies to acquire smaller companies and market newly introduced products will likely support the earnings prospects that are seen in all three companies. This creates a highly bullish scenario as these are some of the best positioned companies in dealing with these new market segments.
In addition to this, Altria, Lorillard, and British American Tobacco all carry relatively elevated dividend yields. This is beneficial for investors for a few different reasons. First, with broader stock valuations continuing to trade at elevated levels, there is going to be near-term scope for downside corrections in a wide variety of financial sectors. Higher dividend yields can help to support the trading prospects that could be seen if markets start to correct to the downside. Second, the low interest rate environment we are seeing now makes good dividend stocks much more valuable, as this is one of the best ways of generating income returns. In all, these three stocks should generate solid and sustainable returns for investors for the foreseeable future. Performances here will be great indicators of where the industry is headed, although the early numbers are clearly indicative of strength.