Altria Group Inc plans to introduce an electronic cigarette

Altria Group Inc. (MO), the largest seller of tobacco in the U.S., plans to introduce an electronic cigarette this year, chasing smaller rivals as demand for traditional smokes declines.
The electronic cigarette will be sold in an undisclosed market starting in the second half of the year, Richmond, Virginia-based Altria said today in a statement. The company plans to discuss the plans further in a presentation in June.

Chief Executive Officer Martin Barrington is trying to catch up to smaller rivals such as closely held NJOY and Lorillard Inc. (LO), which says its blu eCigs brand controls more than 40 percent of the U.S. market. The push comes after Altria’s first-quarter U.S. sales volume tumbled 5.2 percent, with top-selling Marlboro slipping 5.5 percent.
Altria “should be able to use its significant resources to quickly establish itself as a significant player given its dominant sales force and retail coverage,” Christopher Growe, a Stifel Financial Corp. analyst in St. Louis, said today in a note. He recommends buying the shares.
Altria rose 1.2 percent to $35.94 at the close in New York. The shares have advanced 14 percent this year, compared with an 11 percent gain for the Standard & Poor’s 500 Index.
Altria may eventually acquire an electronic cigarette company, similar to how it entered the smokeless tobacco industry by buying snuff maker UST Inc. in 2009, said Kenneth Shea, a Bloomberg Industries analyst in Skillman, New Jersey.

Acquisition Route

“It certainly has the financial flexibility to go the acquisition route,” Shea said by telephone. The company had cash and cash equivalents of $3.78 billion as of March 31, up from $2.9 billion on Dec. 31.
Barrington declined to comment on the conference call today whether Altria was considering a takeover, saying the company doesn’t speculate on potential acquisitions. He also declined to discuss whether the company may be able to use its current brands on electronic cigarettes and whether the company may advertise them on television.
The U.S. Food and Drug Administration is evaluating how to regulate e-cigarettes. The agency’s rules will dictate how Altria markets the product, Barrington said.
Altria today also said first-quarter net income rose 16 percent to $1.39 billion, or 69 cents a share, from $1.2 billion, or 59 cents a share, a year earlier. Excluding some items, profit was 54 cents a share, topping analysts’ average estimate of 53 cents. Revenue slipped 2.1 percent to $5.53 billion.

Displacing Cigarettes

Lorillard CEO Murray Kessler told analysts yesterday the company estimates that electronic cigarette sales displaced consumption of about 600 million cigarettes in the first quarter. That translates to an annual rate of about 2.4 billion cigarettes, accounting for about 1 percent of the U.S. market, according to Shea.
Along with Altria’s decline, first-quarter cigarette shipments also slid at Winston-Salem, North Carolina-based Reynolds and Greensboro, North Carolina-based Lorillard.