Stocks to Watch in E-Cigs: Altria Group Inc., Reynolds American Inc., and Imperial Tobacco Group PLC

By Markets Fool.com

Will e-cigarettes ever replace traditional cigarettes? Big tobacco companies think so, but consumers and regulators aren't so sure.

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E-cigs vaporize liquid nicotine cartridges into vapor, so no cancer-causing tar or smoke is inhaled. Proponents claim that e-cigs aren't more dangerous than nicotine gum or patches, and that their similarity to cigarettes makes them ideal smoking cessation devices. Opponents point out that nicotine might cause heart problems, while certain chemical additives can be dangerous.

Over the past few years, tobacco companies have invested in e-cigs to offset declining shipments of traditional cigarettes. But despite the hype, the overall market is small. According to Nielsen data, the size of the entire e-cigs market was just $1.4 billion in 2014. By comparison, the top three U.S. tobacco companies -- Altria Group , Reynolds American , and Lorillard -- generated combined sales of $40 billion last year. Although the e-cig market remains small, investors should still recognize which companies control the main brands in the market.

Altria Group
Altria, the maker of Marlboro cigarettes, launched its MarkTen e-cigarette nationwide last year. Altria hasn't disclosed exactly how many e-cigs it has shipped, but recent Nielsen data indicates that it only controls about 6.1% of the overall U.S. market.

Altria's MarkTen. Source: Altria

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Nonetheless, the MarkTen brand has continued to evolve with new e-cig flavors and the MarkTen XL, which has twice the battery life of the original. Altria also acquired premium e-cig brand Green Smoke, which is sold in the U.S. and Israel, last year to complement MarkTen's growth.

E-cigs belong to Altria's smokeless products group, which also includes snuff. Last quarter, Altria's smokeless revenue rose 3.6% annually to $430 million, which accounted for just 7.4% of its top line.

Reynolds American
Reynolds American launched its Vuse e-cig nationwide last year. Vuse is currently the top brand in the U.S. e-cig market, with a 35.7% market share. Vuse was one of the first e-cigarettes to use a computer chip to regulate puffs to deliver consistent flavor and track usage.

Reynolds American's Vuse. Source: Reynolds American

The FTC recently cleared Reynolds to acquire Lorillard, the third largest domestic tobacco company after Altria and Reynolds, for $25 billion. But as part of the deal, Lorillard had to sell several of its brands, including Blu e-cigarettes, to U.K.-based Imperial Tobacco Group . If Reynolds had kept Blu, which has a 22.7% share of the U.S. market, it would have dominated over 58% of the market.

Reynolds American classifies Vuse in its "All Other" category, where Reynolds' Zonnic nicotine gum can also be found. Last quarter, revenue at the segment rose 45.3% annually to $77 million, but only accounted for 3.7% of Reynolds' top line.

Imperial Tobacco
Imperial Tobacco, the fourth largest international tobacco company by market share, has become another top stock to watch in e-cigs due to its acquisition of Blu. Imperial also owns Puritane, an e-cig which is marketed as a health care product in the U.K. through a partnership with the Boots pharmacy chain. Earlier this year, it launched Jai, another e-cig for the French and Italian markets.

Imperial Tobacco's Puritane. Source: Imperial Tobacco

Imperial doesn't report revenue from smokeless products like snuff separately from smokeable ones like cigarettes. Instead, it categorizes them all as tobacco products. Its subsidiary, Fontem Ventures, handles the e-cig business, but it's unclear how much revenue the unit actually generates.

Nonetheless, Imperial Tobacco is a top brand to watch in the e-cig market because it owns two new brands in Europe and an established one in the U.S. However, American investors without access to the London Stock Exchange can only buy ADR shares of Imperial Tobacco on the OTC market, so due diligence is advised.

The key takeaways
The e-cig market might grow larger over the next few years, but it shouldn't be considered a primary reason for buying tobacco stocks.

Instead, tobacco stocks should be bought as conservative income investments. Cigarette shipments are certainly slowing down, but tobacco companies have been able to cut costs and raise prices to preserve bottom line growth and consistently boost dividends. Growth in the e-cig market should be seen as an added bonus, just like other non-cigarette categories like snuff, alcohol, or nicotine gum.

The article Stocks to Watch in E-Cigs: Altria Group Inc., Reynolds American Inc., and Imperial Tobacco Group PLC originally appeared on Fool.com.

Leo Sun owns shares of Altria Group,. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.