As E-Cigs Begin to Take a Back Seat to Vaporizers, the Market looks for a Leader to Emerge
August 25 2014 - 8:38AM
InvestorsHub NewsWire
Based on recent financial results one company could show to
be incredibly undervalued
August 25, 2014 - InvestorsHub NewsWire - If we look at this
vape industry as a whole, it's just starting to gain in popularity
as you'll see later in this article. Ironically, as big tobacco
spends billion of dollars to gain ground in the e-cig space (most
notably Reynold's America's $27.4B acquisition of Lorillard), they
may actually soon find themselves behind the 8-ball when it comes
to vaporizer sales. In fact as you'll read, the vaporizer &
e-liquids space has quickly begun to grow, taking both market share
and shelf space away from these products. In a recent review of the
industry by Wells Fargo analyst Bonnie Herzog, the "Vapor Category"
is starting to more meaningfully displace combustible cigarette
volume. A direct result of this decline can be seen through the
recent drop in sales of Blu e-cigs by more than 35%.
Christopher Growe, an analyst with Stifel Nicolaus, said the earnings decrease led
him to lower his fiscal 2014 earnings forecast by 9 cents to $3.33
a share.
"We believe the blu eCigs category growth has been pressured by the
proliferation of 'open-tank' vapor products…We estimate a 24%
revenue decline for the year (for blu eCigs) and a $55 million
operating loss for the division as the company invests heavily in
the blu brand globally."
This alone shows the massive impact that the vaporizer market has
had on a once dominant player who held over 40% of the e-cig
market. Numerous retailers across the country have identified
that many consumers have tried e-cigs and are either dissatisfied
and went back to combustible cigarettes or "graduated" to personal
vaporizer products. For example, convenience stores rank as one of
the largest marketplaces for e-cig sales ($530M) however vaporizers are
quickly taking up more "real estate" not only from the shelves but
from many of the point of sale advertising spots as well. Analyst
Bonnie Herzog is one who thinks that the first quarter of 2014 is
where we start to really see the vapor trend take hold and drive
the combustible cig decline rate at an accelerated pace.
"Bottom line, retailers are starting to either discontinue or
take shelf space away from disposable e-cigs to make room for
personal vaporizers given their attractive growth &
margins."
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In previous reports, Herzog found that e-cig sales declined 12.9%
in the four weeks ended July 5 from the prior period because of
lower prices and as smokers migrated to vaporizers. Herzog
estimates that tanks and e-cigarettes have a combined market of
about $2.5 billion with $1.4 Billion attributed to e-cig sales and
$1.1 Billion to Vaporizers; she believes that tanks will overtake
the latter in the next decade.
Retailers, Ms. Herzog said, are even starting to discontinue or
take shelf space away from e-cigs to make room for tanks, "given
their attractive growth and margins." In fact, one of the most
prominent retailers of these products, convenience stores, have
also realized slower growth rates in both e-cig sales as well as
traditional cigarette products.
Even though vapor tanks are thought of by consumers as being
hunkier than the standard e-cig, they do allow smokers and would-be
quitters to customize nicotine levels, as well as to puff thousands
of flavors. A cult-like following is likely to grow as "vaping"
becomes more fashionable and more stores carry the battery-powered
metal tubes in a wide range of colors. As a result
e-cigarette sales are slimmer this year, prompting manufacturers to
invest in the next generation of inhalant products.
As this new market begins to emerge, we start to dive deeper from
an investment view as not only to find who a potential market
leader may be but to also find those undervalued “diamonds” so to
speak that truly show potential for grabbing the most market share
early on. In this report, we looked at 3 companies all of
which have just submitted recent SEC filings and who boast that
they have unique or breakthrough products. The first company
we looked at was Vape Holdings (VAPE), who focuses on designing,
marketing, and distributing various vaporization products. The
company offers medical and food grade ceramic products primarily
under its “HIVE Ceramics” brand throughout North America, Europe
and South America. In the company’s most recent filing, VAPE
shows to have posted “record” quarterly revenues of $361,781,
bringing its 9-month number to a total of $392,540.
"We are extremely pleased with the Q3 2014 financial results that
represent our first big push to market since our products began
shipping full scale in mid-May," stated Vape CEO and Chairman Kyle
Tracey.
At $2.30 (as of Friday’s close), this is the highest priced
vaporizer company in our report. VAPE
trades at roughly 51x revenues with the current market cap of
$19.8M and despite its record numbers, was only able to generate a
gross margin of a mere 6.8%. As far as a value play here, we
think that Q3 will be a very important time for Vape Holdings to
show its true potential not only because it has just began shipping
product full scale but the company has also recently launched an
e-commerce site as well.
mCig, Inc. (MCIG)
was the second company we are profiling in this market
update. This company focuses on two trends currently gaining
obvious attention: (1) The decriminalization and legalization of
marijuana for medicinal or recreational purposes; (2) The adoption
of electronic vaporizing cigarettes. The company manufactures
and retails the mCig and owns Vapolution, Inc., which manufactures
and retails home-use vaporizers such as the Vapolution 2.0. Through
its wholly owned subsidiary, VitaCig, Inc. the company manufactures
and retails the VitaCig, a $5 nicotine-free eCig that delivers a
water-vapor mixed with vitamins and natural flavors.
This was a bit different in that the company’s actual filing shows
640% jump in annual revenues from $50,000 in 2013 to $370,077
however if you read through the company’s annual report, it will show the
mCig generated company wide revs of %543,000 but management nores
the figure includes revenues from Vapolution, Inc., which means it
does not comply with US GAAP figures that were actually reported in
the 10-K. Despite this piece of information, mCig has shown more
favorable results from operations in that its gross margin was
roughly 57% based on the reported $370k figure. With a market
cap of nearly $111M, MCIG is trading nearly 300 times revenues at
its current share price of $0.41 and it should also be noted that
the stock has just recently begun to rebound following last
Monday’s sell-off. The company boasts strong favor from its
celebrity spokespeople including Bam Margera and Rick Ross who
actively support the mCig and VitaCig brands. We feel that
the results from this next quarter should decide the fate of MCIG
based on its recent successes from Vapolution and the adoption of
its notable celebrity driven marketing strategy.
Finally, we took a closer look at Vaporin, Inc. (VAPO)
and based on results of this study, feel that this company could be
the most undervalued and highest performing one out of the
three. Instead of celebrity spokes people or social media
campaigning, Vaporin is using the same strategy that Blu used early
in its development for e-cigs not only to gain an early market
share in the vape space but also to establish itself as a potential
leader in the vaporizer & e-liquids industry. The company
has also diversified through both an online sales approach &
continuity program in addition to its nationwide convenience store
roll-out. Additionally Vaporin has dove into the cannabis
market through a product distribution agreement with Terra Tech
Inc. (TRTC).
For the 6-months ended June 30 Vaporin shows a total of $602,163 in
revenues (the highs of the 3) and a gross margin of 41% coming in
only second to mCig.
“I am proud of what we have been able to accomplish thus far in
2014. Based on the compounded growth that we have experienced over
these last 6 months, we are confident in our ability to continue
this trajectory throughout the remainder of this year. We are also
looking at opportunities for product line expansions and the
addition of celebrity spokespeople for the next phase of company
growth and ongoing campaign to build brand awareness,” stated Scott
Frohman, CEO of Vaporin in a recent shareholder update.
In keeping all things the same, if Vaporin were to be trading at
50x or even 299x revenues similar to Vape Holdings or mCig, one
would think that this could be the highest priced stock amongst the
group but at $0.07, this company not only has posted higher revenue
numbers to this point but it is also only trading at roughly 20x
earnings making this possibly the most undervalued stock in the
bunch. A similar valuation even if it were like Vape Holdings,
would show the per share price at around $0.18 and in a similar
case as mCig, the pps would be around $1.07 with the current
outstanding share count remaining the same for both cases.
Much to its credit, Vaporin has been working a gorilla marketing
angle and even as other companies like Vape and mCig are seeing
more growth, this next quarter should be the true tale of the tape
as to which one of these companies will emerge as a market leader
thus giving investors an opportunity to find value in an industry
that’s already be slated for increased growth over the next several
years. At this point the vapor revolution is ripe for
investment a right play with a company showing the biggest
potential could pay-off in the long run. Looking at it from
this angle, early investors in Lorillard previous to its purchase
of blu saw great returns and increased value as blu became a leader
in the space. Now that vaporizers have taken center stage,
this next wave of investment could offer more, especially because
the companies within the space trade at a far lower share price
compared to where Lorillard was when it brought on Blu.
The final decision is up to the investor and of course when looking
in the small cap space; volatility and price risk must be taken
into consideration. Always consult a professional when
deciding to make any investment. The above report is simply
based on overall opinion and should not be taken as investment
advice.
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