Tobacco Going Up in Smoke?

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October 1, 2018

Tobacco has been an important product in United States since before the signing of the Declaration of Independence. Now, nearly 250 years later, tobacco products can be found in every shape and size across the entire planet. According to Credit Suisse’s 2015 Yearbook Report, from 1900 to 2010 the US tobacco industry returned an amazing 14.6% annually, outperforming the market over the same time-period by nearly 5%. These numbers demonstrate the massive staying power of tobacco companies, despite the headwinds that the industry has faced over the last 50 years.

Since the CDC published reports on the health implications of smoking cigarettes in the 1960s, the number of smokers in the US has fallen drastically. Public schools now have mandatory curricula on the dangers of smoking, advertisements have been greatly restricted, and nicotine gum and patches have entered the market as healthy alternatives to smoking cigarettes. However, the newest competitor for big tobacco, the electronic cigarette, may be the most formidable challenge yet.

E-cigarettes are being pushed as the cool, clean, and safe new way for people to kick a cigarette habit. The company at the forefront of the industry is Juul Labs Inc, a San Francisco based company, that launched an e-cigarette product in 2015. Since the launch the product has been adopted at an exponential rate, especially amongst millennials. A recent Wells Fargo equity research report focused on tobacco noted that Juul has seen an astonishing increase in its share of the retail e-cigarette market, and now approaches 50% of all dollars spent.

Coinciding with this growth, equity in traditional tobacco companies Phillip Morris & Altria is trading down significantly year to date, at -21.8% and -14.7% respectively. There are many other factors to which this loss can be attributed, but it appears that the trend towards e-cigarettes may be the straw that breaks Camel’s back.

Instead of viewing the recent trend towards e-cigarettes as a major threat to their portfolios, investors are beginning to take the opportunity to fund the rising new companies in the smoking space. This has produced remarkable increases in the values of some e-cigarette companies. However, recent growth trends will need to continue for quite some time to justify the current prices. Juul Labs for instance raised $650 million at a $15 billion valuation this summer to continue its rapid expansion.

An investment in this trendy industry seems full of promise, but not without headwinds of its own. Recently Juul’s sleekly designed e-cigarette, which resembles a USB drive and comes in flavors such as mango or cotton candy, has come under fire for being too easily accessible to underage users. Moreover, these newer companies are going head to head against tobacco companies that have survived for 250 years, and are armed with a total annual lobbying budget of $20 million plus. Only time will tell whether old tobacco or the new e-cigarette sector will go up in smoke.

Corey Erdoes