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Why the big three tobacco companies still win

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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.

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Why the big three tobacco companies still win

  1. 1. Why the Big 3 Tobacco Companies Still Win Picture Source: Asseff Elweter
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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 gamechanger for the industry
  6. 6. No. 3: Reynolds American
  7. 7. 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%
  8. 8. 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
  9. 9. Reynolds American – A Solid 2013 • Introduced Vuse e-cig into Colorado market mid-year and immediately captured a 55% share • Anticipates national rollout
  10. 10. No. 2: Altria
  11. 11. 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
  12. 12. 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
  13. 13. No. 1: Lorillard
  14. 14. 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%
  15. 15. 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
  16. 16. Lorillard – A Solid 2013 • Lorillard is e-cig market leader with a 49% share between its blu eCig brand and justpurchased SkyCig • Acquired blu eCigs last year for $135 million • Operating income grew from $1 million to $9 million
  17. 17. The Motley Fool’s Top Stock for 2014