The tobacco space grabbed the limelight after the FDA issued warnings regarding the sale of e-cigarettes to youths yesterday. The news was welcomed by investors of Altria Group, Inc. (MO - Free Report) , which saw its shares rally 6.7% in a single trading session. This took the Zacks Rank #3 (Hold) stock’s past three-month price performance to an increase of almost 12% against the industry’s dip of 1.3%.
We note that the FDA revealed serious enforcement actions associated with the marketing and sale of e-cigarettes to minors. Per the FDA, e-cigarette consumption among kids has reached “epidemic proportions”, which intimated the regulatory to undertake necessary measures to curb the practice. Well, the FDA has been focused on promoting e-cigarettes among adult smokers to shift their focus away from combustible cigarettes. However, the growing popularity of e-cigarettes among kids compelled it to move toward cracking down on e-cigarette retail sales to the youth.
Toward this end, the FDA prompted five e-cigarette brands including Vuse, Blu, JUUL, MarkTen XL, and Logic to present plans to significantly prevent kids from consuming their products, or face strict actions. This may require these manufacturers to revisit their marketing and sales strategies in order to stop distribution to retailers selling such products to kids.
Such a news was set to spike up shares of major tobacco players like Altria and Phillip Morris (PM - Free Report) , which have been witnessing volume declines for traditional cigarettes for quite some time now. Though these players are also making efforts to expand their electronic cigarettes and other reduced risk product offerings, they face intense competition from JUUL that has captured significant market on this front. Consequently, any potential action against brands like JUUL is likely to work in favor of tobacco biggies like Altria.
Notably, Altria has been witnessing volume declines for cigarettes for a while now, due to anti-tobacco campaigns and increased consumer awareness regarding the harmful impacts of tobacco consumption. Regulatory hurdles are also a vital factor limiting the marketing of cigarettes, thereby adversely impacting its sales volume. This has been hurting Altria’s smokeable product category. During second-quarter 2018, domestic cigarette shipment volumes fell 10.8% year over year, stemming from lower cigarette industry volumes, decline in retail share and unfavorable trade inventory movements.
Talking of regulatory hurdles, the FDA earlier made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. Also, per court orders, Altria and other cigarette manufacturers have been directed to put up self-critical advertisements on television and newspapers to dissuade customers from smoking. Further, in July 2017, the FDA proposed to lower nicotine in cigarettes to non-addictive or minimally addictive levels. This raised further concerns for accelerated sales decline in traditional cigarettes.
That said, the FDA’s actions against the sale of e-cigarettes to minors are likely to place traditional tobacco players like Altria, Phillip Morris and British American Tobacco (BTI - Free Report) on better grounds. In fact, Phillip Morris and British American also remained in the green zone yesterday, with their shares up 3.4% and 6%, respectively. Also, shares of Florida -based Vector Group (VGR - Free Report) gained 2.2%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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