Earlier this year, I quit smoking after 40 years as a regular cigarette smoker. I found that I missed not only the nicotine, but that the ritual of smoking had become ingrained into my life. I like sitting out on my little screened-in lanai here in Florida with the paper, a cigarette and a coffee every morning.
Rather than go back to tobacco and all the tars and other nasty things associated with burning a tube of dried leaves, I decided to try the e-cigarette. It worked very well for me and I liked the fact that I can control the nicotine level as I see fit.
At first, I only used it at home as I felt kind of silly using it in public. However, I’ve noticed that public usage of vaping devices and e-cigarettes is becoming widespread. In March, I went down to Islamorada in the Florida Keys, and e-cigarettes have clearly become a popular choice there; everywhere I looked, I saw people vaping away — at the beach, in bars, even poolside.
This is a real product and may well become a leading growth industry as people look for alternatives to tobacco cigarettes. According to a recent article in Forbes, e-cigarettes and other vaping devices have grown to be a $2 billion market in the last few years. This has some appeal to me as an investor, to say the least.
They hot money is going to look for the smaller companies related to vaping products, but I suspect many of them will turn out to be flash in the pan. Big tobacco companies are moving into the space and already control a large share of the market. Altria Group Inc (NYSE:MO) bought Green Smoke last year for $110 million, and is now rolling out its e-cigarette brand MarkTen this year. Lorillard Inc. (NYSE:LO) makes the best-selling Blu brand of e-cigarettes, and tobacco leaf merchant Universal Corp (NYSE:UVV) has a partnership with a botanical extraction company to produce liquid nicotine.
Right now, the value investor in me thinks that the way to play the future of e-cigarettes is Universal Corporation. UVV already supplies leaf tobacco to Phillip Morris International (NYSE:PM), Imperial Tobacco Group (OTCMKTS:ITYBY), British American Tobacco (NYSEMKT:BTI) and Japan Tobacco (OTCMKTS:JAPAF), so the liquid nicotine used in e-cigarettes and vaping devices should be an easy cross for Universal.
UVV stock is reasonably priced right now. Shares sell for just 95% of book value and 15 times earnings. The stock is currently yielding 4.41%, and the company has a long history of raising dividends and buying back shares to reward stockholders. Compared to leaf tobacco, the liquid nicotine market is small right now, but I suspect it will see rapid growth in the future.
I would also keep an eye on Lorillard shares. The FTC has yet to approve a proposed merger with Reynolds American, Inc. (NYSE:RAI), and LO stock could sell off sharply if the deal falls through. Lorillard has the best-selling e-cig brand, and a comfortable head start on competitors in the e-cigarette space.
We will undoubtedly see exhaustive discussion on the pros and cons of vaping and e-cigarettes in the years ahead, but the product is here to stay and will surely experience strong growth in the future.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.
