Tobacco stocks drop as FDA’s possible menthol ban looms

Tobacco stocks slid Monday as investors feared the consequences of a possible ban on menthol cigarettes, which the U.S. Food in addition to Drug Administration is usually likely to propose This kind of week.

FDA Commissioner Dr. Scott Gottlieb plans to announce This kind of week in which the agency will move forward which has a ban on menthol cigarettes in conjunction which has a crackdown on e-cigarettes to curb “epidemic” levels of teen use, senior FDA officials told CNBC last week.

Analysts brushed aside concerns as mostly a headline risk since finalizing in addition to implementing a rule could take years. However, they noted menthol cigarettes make up a sizable chunk of profits at British American Tobacco, Altria in addition to Imperial Brands.

This kind of spring, the FDA took the first step toward implementing a rule in which might ban menthol or additional flavors by cigarette in addition to e-cigarette products. the item’s unclear how long drafting in addition to finalizing a menthol ban may take, nevertheless the item’s likely to take a year, if not longer. While the Tobacco Control Act says regulation shouldn’t take effect for another year after the item’s finalized, a rule could go into effect earlier if the item’s deemed necessary to protect public health.

British American Tobacco, which sells market leading menthol cigarette Newport, is usually seen as the most vulnerable company. Menthol cigarettes accounting for between 55 percent in addition to 60 percent of its U.S. volumes, driving 25 percent to 27 percent of its global profit, according to estimates by Piper Jaffray analyst Michael Lavery. He estimates menthol cigarettes are about 18 percent to 20 percent of BAT’s cigarette volumes in addition to about 15 percent to 17 percent of profits.

BAT’s operating profit is usually about 10 billion pounds (US$12.86 billion) on a run-rate basis, Lavery said. Last year, the company recorded an adjusted operating profit of 7.9 billion pounds (US$9 billion), he said, nevertheless in which did not include a full year of the U.S. business, which BAT gained through its acquisition of Reynolds American.

Shares of BAT tumbled 8 percent Monday. In an email to CNBC, a spokesman said the company was not aware of “anything in which has changed to suggest the FDA might deviate by its existing multi-year comprehensive, rule-doing process on flavors in tobacco products, which includes menthol.”

“In any event, we look forward to continuing to participate in a thorough science-based review to address the use of flavors in tobacco products,” he added.

Lavery estimates menthol accounts for 25 percent of Imperial Brands’ volume, or 6 to 8 percent of its global profit. For fiscal year 2017, Imperial Brands reported about 3.8 billion pounds (US$4.89 billion) in operating profit, Lavery said.

Imperial Brands’ stock fell about 3 percent Monday.

“Proposals to ban menthol cigarettes inside the U.S. have been for the table for many years in addition to we will continue to engage with the FDA on the topic,” an Imperial Brands spokesman said in an email to CNBC. “We are aware of last week’s renewed media reports regarding menthol tobacco products in addition to will continue to monitor the situation, nevertheless until there’s a formal update by the FDA, we’ll decline to comment further.”

Wells Fargo’s Herzog estimates menthol represents about 21 percent of Altria’s combustible cigarette volume, which totaled 116.61 billion sticks last year, according to a regulatory filing. Herzog also estimates menthol represents about 18 percent of Altria’s total profit, which totaled $9.56 billion last year, according to the filing.

Shares of Altria fell nearly 2 percent Monday. The company declined to comment, saying the item was premature to comment without seeing the FDA’s proposed actions.

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