Pubdate: Sat, 21 Feb 2015
Source: Denver Post (CO)
Copyright: 2015 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: Leonid Bershidsky, Bloomberg News
Note: The longer version of this commentary is at denverpost.com/opinion.

BIG TOBACCO'S FUTURE AS BIG MARIJUANA

You may like technology ( who doesn't these days?) or the energy 
sector ( where would we be without it?) - but if you're making a 
longterm bet as an investor, there's a lot going for Big Tobacco.

It's not just that tobacco boasts the best historical performance of 
allU. S. industries. The industry's future seems especially bright. 
As marijuana gradually becomes a legal drug, Big Tobacco is poised to 
dominate the market.

According to the 2015 edition of Credit Suisse's Global Investment 
Returns Yearbook, a dollar invested in tobacco in 1900 would have 
turned into $ 6.3 million by the end of 2014, by far the best 
performance of all the industries that existed at the start of the 
20th century.

That, of course, reflects the decline of some old industries, like 
coal, railroads and shipbuilding, and fails to account for the 
emergence of new ones. ( A small investment in "some kind of fruit 
company," called Apple Inc., is how Forrest Gump earned his fortune.) 
So perhaps the last 10 years are a better indicator of tobacco's resilience.

Since the beginning of 2005, the MSCI Global Tobacco Index has risen 
196.4 percent, providing an 11 percent annual return. It far 
outperformed the catch- all MSCIWorld Index, which went up 50.6 
percent in the same period. It even did better than the MSCIWorld 
Information Technology Index, which rose 94.4 percent in the past decade.

Despite governments' efforts to get people to quit smoking, a lot of 
them still do, and they represent a stable core market for Big 
Tobacco. In the U. S., for example, 20.9 percent of adults smoked in 
2004 and 19 percent still had the habit in 2011. Markets for 
addictive products are less susceptible to economic crises than any 
others, and- in part because they're so politically toxic-they are 
less bubbly. So investors tend to get a steady return.

Right now, the industry is undergoing a vaping revolution. A 
Bloomberg Intelligence analytical report from last December predicted 
sales of vapor products in the U. S. could climb 44 percent to $ 2.6 
billion this year. So far, much of that market has been in vaping 
liquids and the e-cigarettes that use them, but that technology is 
growing obsolete. The new cutting edge is in "heat not burn" devices, 
which, according to the Bloomberg Intelligence report, "may be highly 
disruptive to the existing tobacco industry" because they use real tobacco.

A "heat not burn" vaporizer heats ground tobacco leaves and delivers 
a nicotine hit to the user without producing much smoke or ashes. 
This still amounts to using an addictive substance in a slightly 
different way, but it's not hard to imagine why smokers might find it 
appealing to inhale less smoke, none of which contains burned paper.

Such "heat not burn" devices are already available from a host of 
smaller companies, but the bigger tobacco companies, such as Philip 
Morris and Reynolds, have made it clear they're intent on catching up.

It may seem that Big Tobacco is merely cannibalizing its existing 
sales by putting out such products. Yet it may be something of a bet 
on the future, too. "Heat not burn" vaporizers can just as easily be 
used to smoke marijuana as tobacco. And they are already gaining 
popularity among cannabis users.

Tobacco companies have never said publicly that they'd like to get in 
on the marijuana business. That's understandable. Selling marijuana 
is still largely illegal in Europe and in much of the U. S., and it 
would be politically suicidal for companies that face as many 
regulatory barriers as tobacco companies do to suggest that they want 
to go into soft drug dealing. But they have long watched marijuana as 
a potential market.

For those not overly worried about the moral strings attached to 
investing in companies that pander to addictions, a greener future 
for Big Tobacco may be one of the biggest opportunities of a lifetime.
- ---
MAP posted-by: Jay Bergstrom