Altria, the maker of Marlboro cigarettes, found a stronger No. 2 competitor last week as a deal was announced to merge Reynolds American and Lorillard. The $27.4 billion merger brings the No. 2 and No. 3 largest U.S. cigarette makers into one company. The combined company will keep the Reynolds American name and will now own both the Camel and Newport brands.
With increased anti-smoking campaigns and heightened health concerns, tobacco use has been consistently falling. Yet, despite falling demand, tobacco companies remain highly profitable because their products are relatively inelastic. Due to tobacco's addictive nature, companies are able to increase the price of their products and their loyal customers will continue to buy.
E-cigarettes own a modest portion of the market today, but have been rapidly gaining more market share. Reynolds is teaming up with British American Tobacco to develop another type of e-cigarette that will allow the user to get the flavor and hint of nicotine by heating the tobacco instead of burning it. The merger creates a company position welled to capitalize on the development of e-cigarettes.
Watch out Marlboro's cowboy, there's a hungry camel creeping up on you.
Ethan Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).