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

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