Call it the revolution that wasn’t, but it looks like e-cigarettes might be getting stubbed out. Global trade data site Panjiva reported recently that shipments of e-cigarettes entering U.S. ports have been declining since late 2013:
Shipments of e-cigarettes entering U.S. ports — by quarter
Shipments of E-Cigarettes Entering US Ports
Meanwhile, shipments of actual tobacco — you know, the carcinogenic stuff that kills you — have actually been on the rise:
U.S. Imports of Tobacco — Dollar Value by Quarter
US Imports of Tobacco (Dollar Value by Quarter)
Bear in mind, however, the following points: These data sets examine imports, not total sales or production. Plenty of e-cigarette paraphernalia gets produced right here in the USA, and America is also a major grower of tobacco. Sales of e-cigarettes and accessories have roughly doubled over the past two years to about $3.5 billion.
Clearly, import data does not tell the whole story. But, it may give us advanced warning of a pending slowdown. If anything, the soaring U.S. dollar should have caused a nice bump in shipment imports, but that has not happened. And, looking at the bigger picture, lower shipments today suggest that retailers might be projecting lower sales tomorrow.
What’s the story here?
Part of it is regulation. When e-cigarettes were first introduced, they existed in something of a regulatory limbo. It wasn’t exactly clear which, if any, of the myriad of existing tobacco laws applied to e-cigarettes, and “vaping” had become a legal way to smoke in public places where traditional cigarettes are banned.
They were also an easy way for underage teenagers to get their nicotine fix, as there were initially no age restrictions on sale. But, those regulatory loopholes are quickly getting closed. At least 42 states now ban sales of e-cigarette products to minors, and bills are being considered in Massachusettes, North Dakota and even in lax-regulation states like Texas and Montana.
Now, I’m not necessarily a fan of government regulation. If I had my way, the e-smokers would be left to exhale their water vapor in peace. But, given the aggressiveness of all levels of government toward tobacco products — from Washington DC down to local neighborhood associations — we should have known it was just a matter of time before there was an organized crackdown.
Though hard data is difficult to come by, in most cities the existing rules that ban traditional cigarette smoking are getting applied to e-cigs. And, the FDA is planning to release a set of new e-cig regulations in June that will probably come close to treating e-cigs like traditional cigarettes.
This is not necessarily a death knell for e-cigs. After all, cigars enjoyed a major boom in popularity in the 1990s and 2000s, even while the anti-tobacco movement was in full swing. But, it does suggest that the notion of e-cigs as the savior of Big Tobacco is ludicrous.
As I wrote late last year, rather than save Big Tobacco, cheap e-cigs filled with generic refill fluid are a lot more likely to speed up its demise. To really put things in perspective, Altria Group Inc‘s (NYSE:MO) annual revenue is more than five times larger than the most generous revenue estimate for the entire vaping industry. It’s hard to see vaping replacing that lost revenue.
Ironically, an FDA crackdown on vaping could play into Big Tobacco’s favor. Altria, Reynolds American, Inc. (NYSE:RAI) and their peers have the experience and legal budgets to navigate a regulatory onslaught better than newer e-cig upstarts. While I don’t believe that Big Tobacco has played its hand well with the rise of e-cigs (see “Big Tobacco Botches the E-Cig Name Game“), they will probably end up being the last men standing.
Is there a trade here?
Probably not. Big Tobacco stocks are surprisingly expensive at today’s prices. Altria and and Reynolds American trade for 17 times and 18 times their respective 2015 expected earnings, and at the lowest dividend yields in memory. And remember, these are companies selling products in terminal decline.
My advice is to sell Big Tobacco. There are better — and safer — income options to be found elsewhere.
As of this writing, Charles Sizemore did not hold a position in any of the aforementioned securities.
