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 US. ports have been declining since late 2013:
Shipments of e-cigarettes entering US ports – by quarter
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
Now, before I go any further, I should point out a couple things. These data sets are looking at 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 e-cigarettes and accessories have roughly doubled over the past two years to about $3.5 billion.
So, import data clearly does not tell the whole story. But it may give us advanced warning of a pending slowdown. If anything, the soaring US dollar should have caused a nice bump in shipment imports, which clearly has not happened. And looking at the bigger picture, lower shipments today mean than retailers might be projecting lower sales tomorrow.
What’s The Story?
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 Massachusetts, 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 towards tobacco products -- everything from Washington DC down to the local neighborhood association -- we should have known it was just a matter of time before we saw an organized crackdown. Though hard data is hard 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 on releasing 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 that e-cigs would be 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. And to really put things in perspective, Altria Group (NYSE:MO) annual revenues are more than five times larger than the most generous estimate of the revenues for the entire vaping industry. It’s hard to see vaping replacing those lost revenues.
Ironically, an FDA crackdown on vaping could play into Big Tobacco’s favor. Altria, Reynolds American (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?
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.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.