Morgan Stanley shares thoughts on e-cigs

In a report summarizing “key thoughts” on e-cigarettes, financial services provider Morgan Stanley acknowledges it has been surprised by the success of e-cigarettes, given the commercial failures of other innovative products such as Accord and Eclipse and the slower-than-envisioned development of tobacco segments such as snus and dissolvables.

E-cigarettes have already achieved volume equivalent to about 1 percent of the U.S. market. Morgan Stanley attributes the sector’s success to effective nicotine delivery, broader consumer acceptance of technology, widespread consumer perception of less health risk versus conventional combustible products, growing societal pressure against cigarette smoking and the current regulatory vacuum, which allows for aggressive marketing.

At the same time, the bank notes that e-cigarettes won’t necessarily benefit established tobacco companies. The potential business risks to the traditional industry include cannibalization of tobacco cigarette sales volumes, FDA regulations preventing the marketing of e-cigarettes under tobacco cigarette name brands and uncertainty about the capacity of e-cigarettes to develop the brand equity and consumer loyalty that is typical for traditional cigarettes.

According to Morgan Stanley, Lorillard is best positioned to take advantage of the new segment because it owns the current e-cig market leader Blu Ecigs, while Reynolds American “probably has the most to gain from cigarette industry discontinuity.” Altria, as the dominant cigarette incumbent, has the most to lose.

Future success for e-cigarettes, according to the investment bank, depends on the scale and pacing of technological and product performance improvements, along with ultimate FDA regulation and federal/state excise tax structure, the analyst said.