Goldman Sachs Goup, Inc. (NYSE:GS) showcases secular disruptive themes which they believe possess the potential to reshape their categories and command greater investor attention in the coming years.
Goldman Sachs: E-cigarettes vs traditional cigarettes
Imagine a product that is possibly >99% less harmful than cigarettes, delivers a similar use experience, and offers a better economic bargain—this is the proposition of electronic cigarettes (e-cigs). According to Judy E. Hong of Goldman Sachs Goup, Inc. (NYSE:GS) e-cigs have the potential to alter the status quo of the U.S. tobacco market and accelerate the volume decline of traditional cigarettes. They estimate that e-cigs could reach $10bn in retail sales over the next several years, up from over $1bn this year, and account for more than 10% of total tobacco industry volume (on cigarette equivalent pack basis) and 15% of the total profit pool by 2020.
Goldman Sachs Group, Inc. (NYSE:GS) noted that The Big 3 Tobacco: Altria Group Inc (NYSE:MO), Lorillard Inc. (NYSE:LO) and Reynolds American, Inc. (NYSE:RAI) “Big 3” US tobacco manufacturers have a tremendous amount at stake given the concentrated structure of the market with predicted pricing power and expected rates of cannibalization that e-cigs are likely to have on conventional cigarettes.
Natural gas use in transportation
Jerry Revich and Ravi Gill of Goldman Sachs Group, Inc. (NYSE:GS) said natural gas use in transportation is in the very early stages of a strong, long-term adoption curve driven by favorable fuel spreads, expanding re-fueling infrastructure, and product cost reductions. They see the highest penetration opportunity for natural gas engines in high-mileage trucking applications where fuel costs savings are greatest. Natural gas costs are now $1.50, or 40% below diesel per gallon equivalent, driving strong returns for high-mileage applications.
Cummins attractive for investment
Analysts noted that Cummins Inc. (NYSE:CMI) is the most attractive investment levered to natural gas engine adoption via its low cost spark-ignited engine technology that provides the lowest cost engine for the truck industry. Spark ignited engines are currently the dominant technology in the nascent natural gas truck engine market via the Cummins Westport joint venture, a JV that’s scheduled to expire in 2021, with production based in Cummins facilities. We estimate an NPV of $9 per share from the JV and the long-term economics for CMI. In addition, Cummins plans to launch its 15L spark-ignited engine in 2015, the only significant new offering in that horsepower range.