Philip Morris To Enter The Electronic Cigarette Business; Shares Fall 2 percent - Philip Morris Intl (NYSE:PM)

On November 20,

Philip Morris,

the world's second largest cigarette seller announced the company plans to enter the electronic cigarette market in 2014. Electronic cigarettes, or e-cigs, are battery-powered devices that create vapour that users inhale. The cigarettes are intended to provide a user with a smoking experience that is close to the smoking an actual cigarette in terms of texture, taste and smoke. Shares of Philip Morris began selling off shortly after noon after reports surfaced of the company's intentions. At first glance, it would appear the company is entering a fast growing market, but clearly investors and traders viewed the company's announcement as bearish. The announcement from Philip Morris comes on a day when several sources are highlighting the FDA's closing-in on final rules for e-cigarettes. Investors in the name could also be considering the possibility of increased scrutiny of the company's future products. Increased scrutiny naturally equates to increased spending on pushing deliberations through the pipeline. Traders are also speculating that e-cigs will deliver a much lower margin and affect the company's bottom line.

ABC News reported that a user who smokes one pack a day will have to spend $600 in replacement cartridges using an e-cig. The same user typically spends more than $1,000 a year to purchase cigarettes at convenience or grocery stores. Investors in cigarette stocks have been facing with the prospects of declining margins for the past few months based on comments made by industry analysts and other major tobacco firms. “For our current year to September 2014, I am not assuming any improvement in the market environment, but clearly one can hope,” Imperial Tobacco Chief Executive Allison Cooper told Reuters. A survey released by Wells Fargo concluded that lower tobacco industry profits are directly correlated to the rise in e-cigs that have gained sufficient distribution to reach the mass market. 100% of surveyed tobacco resalers and wholesalers, representing over 45,000 U.S convenience stores, are selling e-cigs. A staggering 98 percent of them reported growing sales in the first quarter of 2013. Bonnie Herzog at Wells Fargo speculated that “the consumption of e-cigs could surpass consumption of traditional cigs within the next decade.” Shares of Philip Morris were trading lower by 2.5 percent at $89.00 in the hours following the company's announcement. The tobacco giant has under-performed the S&P 500 over the last year, trading higher by barely 5 percent year over year. The S&P 500 is up over 25 percent year over year.

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