Pubdate: Thu, 17 Apr 2014
Source: Washington Times (DC)
Copyright: 2014 The Washington Times, LLC.
Contact:  http://www.washingtontimes.com/
Details: http://www.mapinc.org/media/492
Author: Meghan Drake
Page: A1

WITH POT AND E-CIGARETTES, BIG TOBACCO IS JUST WAITING TO INHALE NEW MARKETS

Electronic cigarettes and marijuana could prove a vital breath of
fresh air for the nation's fading tobacco industry.

Desperate for new products and new customers as social and legal
attitudes toward cigarette smoking have changed in recent decades,
e-cigarettes and legal pot could be throwing a lifeline to Big
Tobacco, which already boasts the marketing expertise and regulatory
savvy to take advantage of the opportunity.

"Bottom line, the long-held investor perception of tobacco as a sunset
industry is wrong," said David Sealy, senior equity research analyst
at the Boston Co. and author of an analysis released Wednesday of the
changes sweeping the industry.

The major tobacco companies, including RJ Reynolds, Lorillard and
Altria Group, the parent company of Philip Morris USA, are poised to
benefit from these "potential game-changers for the growth-challenged
tobacco industry."

The new products and market opportunities are arriving just in time,
Mr. Sealy said, as its core cigarette business slowly declines.

"It's only a matter of time before it goes away," he
said.

Mr. Sealy said it is no longer an industry that rolls tobacco, but an
industry that provides nicotine. Discussion over the saving powers of
e-cigarettes and marijuana to the tobacco industry comes at a time
when industry officials, investors and consumers are watching what
regulations, if any, the Food and Drug Administration will place on
e-cigarettes.

With regulations in mind, the report says the $3 billion e-cigarette
market is only going to grow and become more of a substantial player
in the tobacco industry. The legalization of marijuana will become an
option for tobacco companies as well.

"Quantifying the exact change will depend on regulator response, but
anyone not thinking about these related opportunities will miss an
inflection in one of the world's largest and oldest consumer
businesses," Mr. Sealy said in the report.

Moving away from nicotine, The Boston Co. report brings another
debated drug into the picture as a viable product to sustain tobacco
industries: marijuana.

Sixteen states have decriminalized marijuana use, 20 states have
allowed medical marijuana use and Colorado and Washington have fully
legalized marijuana use. Mr. Sealy said these trends, plus polling
that cites 58 percent of Americans support marijuana legalization,
signal "snowballing" to move toward national legalization.

"The momentum behind marijuana legalization has not been lost on the
marketplace. To date, the market has focused mostly on speculative
small caps, but if legalization becomes official federal policy, Big
Tobacco will end up dominating the marijuana market," he said in the
report.

But the focus of a savior to the tobacco industry remains on
e-cigarettes.

E-cigarettes started with small entrepreneurial businesses that often
sell over the Internet, but Big Tobacco, or the handful of major
tobacco companies, are ready to capitalize on the device that delivers
nicotine through vapor.

One of these top tobacco companies, Lorillard, has developed Blu
eCigs, a brand of e-cigarettes that boasts 50 percent of the U.S.
e-cigarette market. In the company's 2013 annual financial report, net
sales increased by 4.9 percent because of an increase in both
traditional and electronic cigarettes.

Lorillard's traditional cigarettes such as Newport and Maverick
increased in net sales by $158 million. The net sales of their
e-cigarettes increased even more, by $169 million.

But not all analysts and tobacco companies are encouraged by the
e-cigarette craze. A report out this week by Moody's Investors Service
said e-cigarettes will not have a significant impact on the tobacco
industry in the next couple of years because the product makes up only
1 percent to 2 percent of the total U.S. tobacco market.

"Despite the excitement about the category and its extraordinary
growth, we believe that the earnings contribution will be quite modest
over the near term," said Nancy Meadows, vice president and senior
analyst of Moody's Investors Service corporate finance group.

Other tobacco companies are more in line with Ms. Meadows' thinking.
According to the 2013 annual financial report, Altria, the parent
company to Philip Morris USA, reported a 0.6 percent decrease in net
revenue, citing lower revenue of smokeable products as the source.

The maker of Marlboros reported that its domestic-cigarette shipment
volume was down 4 percent, "primarily due to the industry's rate of
decline, changes in trade inventories and other factors, partially
offset by retail share gains."

Although the cigarette industry's volume has decreased, the revenue
has remained flat with some small fluctuations. Ms. Meadows said the
addictive nature of nicotine keeps the demand steady.

"Tobacco has traditionally a very low price elasticity for demand,
which means it's easier to raise prices without risking a decline in
demand," she said.

The results of whether the e-cigarette will carry the tobacco industry
may be a long time coming, but one thing is for sure: Big Tobacco will
be reaping the benefits. Accustomed to regulations and taxes for their
traditional cigarettes, major tobacco companies are experienced in
selling a product surrounding by barriers. If regulations stop
Internet sales of e-cigarettes and marketing is cut, the small
businesses that pushed e-cigarettes into the market no longer will be
able to compete with major tobacco companies.

"It would take sustained growth over years for it to have any
meaningful impact on credit metrics of U.S. tobacco companies," Ms.
Meadows said.
- ---
MAP posted-by: Matt