From Vector: A No-Nicotine Smoke

Even for nonsmokers, shares of Vector Group (VGR ), which owns cigarette maker Liggett Group, may prove enticing. Its new cigarettes aren't typical: Made from genetically modified tobacco, they are virtually free of nicotine and have no nitrosamines, a potent carcinogen.

The no-nicotine and no-carcinogen combination will be a "powerful attraction" to smokers and could propel Vector's stock to new heights, according to David Mills, who runs FleetBoston Financial's Mid-Cap Fund. "As value investors, we think Vector is undervalued based on its cash flow, dividend yield of 5.3%, earning power, and assets," says Mills. Even before the new cigarettes, to be launched in 2002, arrive on the market, the stock could climb to 40, says Mills. It has already taken a leap: from 10 in June, 2000, to 34 on May 16. Financier Carl Icahn recently bought a 13% stake.

By cutting out nicotine in the tobacco, the addictive power of the cigarettes is eliminated, says Bennett LeBow, chairman and CEO of Vector. The new cigarette "lights, tastes, and smokes just like conventional cigarettes," he says. Previous attempts by others to make nicotine-free cigarettes failed, he says, because of poor taste.

With the U.S. tobacco market estimated at 420 billion cigarettes a year, each 1% market share would equal 4.2 billion units. At a royalty rate of just 1 cents cent per cigarette, 1% utilization by other makers would represent $42 million in royalty income alone for Vector, figures LeBow----excluding Vector's direct sales. The company posted sales of $739 million and earnings of $6.28 a share in 2000.

By Gene G. Marcial

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