Smokers face ever increasing public scrutiny. After a 2006 U.S. Surgeon General review found that smoking restrictions were unlikely to harm businesses, many cities throughout the country enacted public smoking bans in workplaces, restaurants and bars. Outdoor smoking bans have also doubled over the past five years in the U.S., according to CBS News.
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Electronic cigarettes, or e-cigarettes, provide smokers with a way to avoid many of these bans by emitting harmless water vapor instead of second-hand smoke. With just five chemicals in e-cigarette vapor compared to the 9,000 chemicals in tobacco smoke, Tom Kiklas of the Tobacco Vapor Electronic Cigarette Association insists they are some 1,400 times healthier.
Goldman Sachs analysts believe that e-cigarettes could account for 10% of all U.S. tobacco volume and 15% of profits by 2020. In terms of revenue, the analysts project that sales will expand from $1 billion in 2013 to $10 billion over the next several years. These trends could have a significant impact on big tobacco companies like Reynolds American Inc. (NYSE: RAI).
American Heritage Builds a Brand
American Heritage International Inc. (OTCBB: AHII) acquired American Heritage LLC on August 28, 2013 to capitalize on the rapidly growing e-cigarette industry. Over the past two and a half years, American Heritage LLC has developed four lines of premium disposable e-cigarettes that have numerous advantages over the competition, according to its 10-Q filing with the SEC.
Whereas most e-cigarettes are manufactured overseas with little regulatory oversight, the company’s primary ingredients are food grade quality and produced in the U.S. for a safer and more enjoyable experience. The firm’s e-cigarettes have also been developed with a softer filter that provides a more realistic look and feel than its competitors. These attributes resulted in 90% of respondents in focus groups and peer reviews preferring its product versus competitors.
American Heritage’s e-cigarettes will be value priced at $10.00 for a single pack and $20.00 for a value pack of three. Similar to 5-Hour Energy’s business model, the company’s products will be shipped in retail displays made for convenience stores, gas stations, gift shops, airports and other areas where impulse buying near cash registers is commonplace.
Since making the acquisition in August, the company has already begun selling the e-cigarettes on its website, received its first purchase order, and established a relationship with a major distributor that can place the product in over 25,000 retail locations. Management plans to supplement this commercialization with a nationwide marketing effort designed to showcase the product’s true-to-life flavor and realistic look-and-feel to potential customers.
Potential Investment Opportunity
E-cigarettes are rapidly growing in popularity given their ability to work around smoking bans and their improved health profile compared to tobacco. With Goldman Sachs projecting revenues to hit $10 billion over the next several years, investors may want to consider building exposure into their portfolios, especially if they’re holding traditional tobacco stocks like Philip Morris International Inc. (NYSE: PM) or Altria Group Inc. (NYSE: MO).
American Heritage International represents a unique opportunity in this market. With a market capitalization of just $84 million, the stock trades at a fraction of its potential if it’s successful in entering the multi-billion dollar e-cigarette industry. The company also has several near-term catalysts, including its first retail sales, new distribution agreement, and upcoming marketing campaign that could provide a significant boost over the coming quarters.
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