Vapor was an industry pioneer. It entered the business more than five years ago. Manufacturing relationships were established in China, where the technology was invented. Brand names were created. Distribution channels were opened up. A series of snafus impacted performance in 2011-12, though, just as the industry began to roll. Several major tobacco companies entered the industry via acquisitions as the same time. Those companies used their marketing muscle to capitalize on the industry's 100% annual growth rate, leaving the company behind. At present Vapor's sales are approximately 10% of those generated by the industry leaders.
Vapor is attempting to mount a comeback in 2014. Costs were brought back under control last year. Operations were streamlined. The products themselves were upgraded. And a windfall distribution partnership was established with a Hollywood mogul (Ryan Kavanaugh) with big plans to make Vapor a success. Kavanaugh is a self-made billionaire who has made a significant impact on the movie industry by focusing almost entirely on statistical and financial variables. His productions consistently make money. His company has developed a broad range of retail relationships to promote products that are connected with his movies. The company also has connections with high profile celebrities, who might be recruited to promote Vapor's "Krave" brand on Twitter and other social media outlets. Kavanaugh is committed to promote the company's products through a detailed contractual relationship. It's thought he wants the effort to work as a matter of pride, as well.
Vapor has little chance of competing with the major cigarette companies without Kavanaugh's help. But the fact of the matter is, he is on board. (He's on the company's board of directors, in fact.) Financial performance is likely to be unspectacular during the transition phase. First quarter results probably will demonstrate little improvement on a sequential basis. But sales and earnings could accelerate in the June period as new retail relationships go into effect. Reinforcement on the social media front could provide additional impetus. Overall industry sales are continuing to expand at a 100% rate, moreover. Those gains actually could pick up speed as a result of recent publicity surrounding e-cigarette technology.
Vapor is small enough that it might be able to take advantage of a development like that. We think there is a good chance the industry could take on an anti-Big Tobacco flavor. That sort of thing could happen in the marijuana industry, too, if that's ever legalized. Imagine the head shops knocking off the Marlboro Man.
These shares trade at a high valuation. Vapor competes with more established companies that already have greater market shares. The government is on its tail. And the industry remains in an early stage of development. Things could go in any number of directions, with or without the company. Our advice is to avoid the stock until a lower starting price emerges or the picture comes into better focus. It's an interesting story, though. Vapor deserves keeping an eye on.
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