Tobacco's Vapor Labor Looks Good on Paper – Wall Street Journal

April 22, 2014 3:29 p.m. ET

“A million dollars isn’t cool. You know what’s cool…a billion dollars.”

That line was famously attributed to early


Facebook Inc.



FB +2.92%



Facebook Inc. Cl A


U.S.: Nasdaq


$63.03


+1.79
+2.92%



April 22, 2014 4:00 pm

Volume (Delayed 15m)
:
59.72M



AFTER HOURS



$63.08


+0.05
+0.08%


April 22, 2014 4:45 pm

Volume (Delayed 15m):
459,778




P/E Ratio
103.33

Market Cap
$157.09 Billion


Dividend Yield
N/A

Rev. per Employee
$1,242,230









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backer

Sean Parker

in “The Social Network.” Nowadays, what he thinks is cool is a possible replacement for smoking: “vaping.”

So are U.S. tobacco giants


Lorillard Inc.,



LO +0.38%



Lorillard Inc.


U.S.: NYSE


$55.01


+0.21
+0.38%



April 22, 2014 4:07 pm

Volume (Delayed 15m)
:
3.39M



AFTER HOURS



$55.08


+0.07
+0.12%


April 22, 2014 4:30 pm

Volume (Delayed 15m):
123,515




P/E Ratio
17.48

Market Cap
$19.87 Billion


Dividend Yield
4.47%

Rev. per Employee
$1,714,480









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Altria Group Inc.



MO +0.57%



Altria Group Inc.


U.S.: NYSE


$38.64


+0.22
+0.57%



April 22, 2014 4:01 pm

Volume (Delayed 15m)
:
8.77M



AFTER HOURS



$38.55


-0.09
-0.23%


April 22, 2014 4:45 pm

Volume (Delayed 15m):
82,964




P/E Ratio
17.10

Market Cap
$76.38 Billion


Dividend Yield
4.97%

Rev. per Employee
$1,962,560









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and


Reynolds American Inc.



RAI -0.13%



Reynolds American Inc.


U.S.: NYSE


$55.01


-0.07
-0.13%



April 22, 2014 4:03 pm

Volume (Delayed 15m)
:
1.90M



AFTER HOURS



$55.01


0.00
0.00%


April 22, 2014 4:25 pm

Volume (Delayed 15m):
18,187




P/E Ratio
17.52

Market Cap
$29.55 Billion


Dividend Yield
4.87%

Rev. per Employee
$1,556,900









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Expect plenty of discussion about their vapor-product strategies during earnings calls this week by investors excited about e-cigarette startup Njoy Inc.’s $1 billion valuation. Mr. Parker is an early investor.

Of course, those companies are still called “big tobacco” for a reason. Retail cigarette sales of $90 billion are about 90 times as much as the e-cig market. But sales of the latter doubled last year; cigarette volume is dropping around 4% annually.

Lorillard, the smallest of the three in tobacco sales, is the leader with a 47% share nationally in e-cigs—slightly ahead of Njoy. Though Lorillard earned essentially zero last year from e-cigs, its Blu e-cig division might be worth 5% or more of its market value based on Njoy’s recent fundraising. Reynolds and Altria are in the process of rolling out competing products nationwide.

Investors resigned to a shrinking business that produces wads of cash suddenly find some of it being poured into a rapidly growing, unpredictable industry. Lorillard, with just 14% of the U.S. tobacco profit pool, compared to Altria with 51%, could be top of the heap if today’s e-cig situation prevails. It won’t.

Already, analysts at Wells Fargo estimate e-cigs are losing share to other vapor-delivery methods dominated by smaller firms. Regulators and the taxman will leave a mark, too. The Food and Drug Administration has said it would soon propose e-cig regulation.

That could help big tobacco. Regulation and higher barriers to entry may help them become “big vapor.” In the best case, e-cigs could arrest the industry’s decline and, assuming gross margins rise to the 50% enjoyed by cigarettes, grow earnings more quickly.

Another possibility—and one not factored into big tobacco’s valuations—is that e-cigs cause sales to fall more quickly. Today’s $15 billion tobacco profit pool may not just be smaller, it may be spread among more players.

Where there’s smoke there’s vapor.

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