why the big three tobacco companies still win
DESCRIPTION
Facing a declining cigarette market over the past few years, the major cigarette manufacturers are as profitable as ever. And for good reason! Have a look at the Motley Fool's newest slide show on the major Tobacco players to learn where the investment opportunities are.TRANSCRIPT
Why the Big 3 Tobacco Companies Still Win
Picture Source: Asseff Elweter
The Big Tobacco Industry
• Traditional "big tobacco" companies have had to adjust to a declining market over the past decade
• Shipment volumes have declined at 3.6% compounded annual rate over last 10 years
• Discount cigarette brands have grown from less than 2% of the market in 1998 to nearly 14% in 2013
The Big Tobacco Industry
• Yet Tobacco companies remain as profitable as ever
• FDA has approved ZERO new tobacco products since getting power to regulate in 2009
• Tobacco companies have ability to virtually raise prices at will, allowing gross and net margins to widen
The Big 3 U.S. Tobacco Companies
Company Ticker Market Cap
Altria MO $74.53 billion
Lorillard LO $18.24 billion
Reynolds American RAI $26.31 billion
Big Tobacco Performance
• Despite similarities in business models, each tobacco giant has a unique characteristic to set it apart
• Shares of all of the Big 3 tobacco companies appreciated in 2013, but who was the biggest winner and why did they soar?
• Electronic cigarettes could be the biggest game-changer for the industry
No. 3: Reynolds American
Reynolds American – A Solid 2013
• Key brands including Camel, Pall Mall, and
Natural American Spirit continue to perform well• Total cigarette shipment volumes fell 6.3%
through first nine months• But operating income rose almost 28%
Reynolds American – A Solid 2013
• Able to push through price increases on tobacco products
• Camel Snus -- smokeless, moist tobacco product -- continues to grow
• Camel Snus holds about an 80% share of the U.S. snus market
Reynolds American – A Solid 2013• Introduced Vuse
e-cig into Colorado market mid-year and immediately captured a 55% share
• Anticipates national rollout
No. 2: Altria
Altria – A Solid 2013• Flagship Marlboro
brand comprises approximately 85% of total cigarette volume sales of the company
• Marlboro has a 43.6% share of the cigarette market
• But sales were down 3.8% over first 9 months
Altria – A Solid 2013
• Reduced promotional allowances to wholesalers by $0.06 per pack while increasing price per pack by $0.06 in December 2012 and June 2013
• Holds a 27% stake in brewer SABMiller that will provide ballast for declining cigarette volumes
• Will partner with Philip Morris International to globally distribute e-cigs and other smokeless tobacco products
No. 1: Lorillard
Lorillard – A Solid 2013
• Cigarette shipment volume declines were negligible over first 9 months
• Volumes increased 3.5% in the third quarter• Premium brands enjoyed volume increases of 1%
Lorillard – A Solid 2013
• Increased cigarette market share to 14.9%• Newport remains key brand representing over
88% of cigarette shipment volume• Newport commands 12.6% share of the total
retail market, 17.2% share of the premium cigarette market, and 37.3% share of menthol market
Lorillard – A Solid 2013• Lorillard is e-cig
market leader with a 49% share between its blu eCig brand and just-purchased SkyCig
• Acquired blu eCigs last year for $135 million
• Operating income grew from $1 million to $9 million