eCig Advertising Marketing Snares the Cool eKid Generation in Net

NEW YORK (TheStreet) -- Increased competition in the electronic cigarette market could lead to an explosion of advertising for the product bringing nicotine back to the public consciousness in full force.

R.J. Reynolds (RAI) said earlier this month that it would expand its Vuse electronic cigarette brand nationally, making it the second of the three big tobacco companies -- Lorillard (LO) and Altria (MO) -- to make a serious national push into e-cigarettes.

Lorillard was the first national player in e-cigarettes when it acquired Blu eCigs in 2012 for $135 million, and now commands close to 40% of current market share.

The expansion into e-cigarettes could ignite an advertising battle between Reynolds, Lorillard, and Altria as all three fight to capture market share in the burgeoning vaporized cigarette industry. Earlier this year a study was published by the journal Pediatrics, showing that between 2011 and 2013 exposure to e-cigarette TV ads increased by 256% among adolescents ages 12 to 17 and by 321% among young adults, ages 18 to 24.

The advertising most often appeared on broadcast network programs that were among the 100 highest rated youth programs for the 2012-2013 TV season. In one commercial, the stunning actress Jenny McCarthy discusses how she enjoys e-cigarettes because they are more "satisfying" than traditional tobacco based cigarettes.

Read: Philip Morris Focuses on Hot E-Cigarettes to Overcome Expected Cool Earnings

Lorillard's Blu eCigs accounted for almost 82% of all nationally aired e-cigarette ads viewed by 12- to 17-year-olds, the study said.

Jennifer Duke, lead author of the study and a public health researcher at RTI International in Research Triangle Park, N.C., was unavailable to comment on how increased competition in the e-cigarette space may lead to more advertising dollars spent on the product. In an effort to show how competition could lead to more exposure of e-cigarettes, a classic lesson from microeconomic theory on imperfect competition suffices.

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Firms in an imperfectly competitive market, where products differ in quality may advertise heavily as to provide consumers with useful information and allow new firms to enter an industry while giving their product recognition and credibility.

The issue that arises is that advertising is costly, and competition can create a sort of arms race for the spotlight. Considering Lorillard currently has strong leadership in the industry, the other two tobacco firms could compensate by heavily advertising their products. When firms spend too much on advertising it becomes inefficient to capturing profits while resulting in plenty of exposure to the nicotine based product by all ages of the U.S. population.

The cost of advertising may end up being more than just monetary, however, and could lead to a revival in the "smoking is cool" trend popular in the mid-20th century with eCigs targeting not just smokers but the e-generation.

At the time of publication, the author had no position in any of the funds mentioned. Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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TheStreet Ratings team rates REYNOLDS AMERICAN INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate REYNOLDS AMERICAN INC (RAI) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, solid stock price performance and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite its growing revenue, the company underperformed as compared with the industry average of 3.0%. Since the same quarter one year prior, revenues slightly increased by 2.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Tobacco industry and the overall market, REYNOLDS AMERICAN INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Compared to its closing price of one year ago, RAI's share price has jumped by 30.53%, exceeding the performance of the broader market during that same time frame. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • REYNOLDS AMERICAN INC's earnings per share declined by 31.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, REYNOLDS AMERICAN INC increased its bottom line by earning $3.14 versus $2.24 in the prior year. This year, the market expects an improvement in earnings ($3.35 versus $3.14).
  • The gross profit margin for REYNOLDS AMERICAN INC is rather high; currently it is at 53.13%. Despite the high profit margin, it has decreased significantly from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 18.75% trails the industry average.

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