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What FDA's Stance on E-Cigarettes Means for Tobacco Stocks

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The e-cigarettes arena in the tobacco space has been in the spotlight since the past few days, thanks to FDA’s latest moves to curb the rave of such products among the youth. The FDA has issued a series of actions and directives for companies manufacturing e-cigarettes.

In response to the recent legal enactments surrounding e-cigarettes, Altria (MO - Free Report) has applied for the review of smokeless tobacco product — Copenhagen Snuff. Earlier, the company had applied for the approval for commercializing Philip Morris’s heat-not-burn product — iQOS — which is yet to be cleared. Other companies are also expected to reform the manufacturing process and sale of e-cigarettes to comply with the latest enactments.

FDA’s Roadmap to Control E-Cigarettes Among the Youth

The FDA has been supportive of policies that claim e-cigarettes to help adult smokers quit combustible cigarettes. However, the agency does not approve that meeting this objective should affect the health of children and teenagers. Per the FDA, more than 2 million school children were found use e-cigarettes in 2017. Combating the consumption of nicotine related products among youth is extremely vital, as it affects brain development and causes major illnesses.

Such concerns propelled the FDA to put a check on on some of the major e-cigarette products namely JUUL, Vuse, Blu, MarkTen XL and Logic. These brands account for almost 97% of the domestic e-cigarette market, the highest coming from JUUL that commands close to 55% of the market share. We note that Vuse is manufactured by British American Tobacco (BTI - Free Report) , Blu by Imperial Brands, MarkTen XL by Altria and Logic by Japan Tobacco.

These companies have been asked to submit detailed plans regarding how they can prevent teens from using such products. Moreover, the FDA has asked these companies to submit documents containing complete details of the ingredients used in their e-cigarette brands, their marketing and designing, to understand why they are popular among youngsters.

Further, the agency issued 1,300 warning letters and enforced fines upon retailers who illegally sold e-cigarettes to minors. Warnings were also given to online retailers who sold misleading e-liquids, claiming them to resemble kid-friendly products. Further, the FDA has warned retailers that violation of the restriction of e-cigarette sales to minors will lead to severe civil and criminal legal measures. 

Apart from these, the FDA will continue to investigate the risks associated with newly-launched tobacco products, especially in context of teen-usage before providing premarket authorization. This particularly entails examining the role of flavors attracting the young crowd. Also, the agency will continue to explore measures to make all tobacco products less harmful. All such moves are directed to monitor the actions of manufactures and sellers of tobacco and related products.

Impacts of Recent FDA Moves on Tobacco Companies

These moves spiked the shares of major traditional tobacco players such as Altria, Phillip Morris (PM - Free Report) , British American and Vector Group (VGR - Free Report) that have gained almost 5.7%, 2.4%, 3.6% and 1.2%, respectively, since the FDA’s official release. Even though these companies have their own e-cigarette brands, they account for a low proportion of total revenues.

Hence, actions taken against such products are expected to have less negative impacts on their performance. In fact, the stern action against JUUL, which was rampantly gaining popularity amid smokers, comes as a blessing in disguise for other tobacco players.

Though the recent uptick in stocks sends ripples of positivity, it is yet to be seen if this can be sustained.

We note that tobacco players have been grappling with several regulatory hurdles surrounding cigarette sales, which counts as their major revenue source. Earlier, the FDA made it mandatory for tobacco companies to use precautionary labels on cigarette packets. Also, per court orders, cigarette manufacturers have been directed to put up self-critical advertisements. Further, in July 2017, the agency proposed to lower nicotine in cigarettes to non-addictive or minimally addictive levels.

We note that these factors have been denting cigarette consumption rates and eclipsing the performance of players in the industry. Shares of British American and Vector Group have declined 12.9% and 19.2% in the past six months, respectively. The stocks carry a Zacks Rank #4 (Sell).

Moreover, shares of Philip Morris have declined 20% in the past six months. Philip Morris currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here..

In fact, concerns surrounding declining cigarette volumes have dragged the performance of the Zacks Tobacco Industry, which has underperformed the S&P 500 and the broader Zacks Consumer Staples Sector in the past year. Stocks in the tobacco industry have collectively tumbled 11.9% in the past six months.

Meanwhile, the Zacks S&P 500 Composite has rallied 8.1%, whereas the Zacks Consumer Staples Sector has lost 2%. Further, we note that the tobacco industry is currently ranked among the bottom 9% out of more than 256 Zacks industries.

However, not all stocks in the tobacco space have been losing grounds. Shares of Altria, with a Zacks Rank #3 (Hold), have gained 1.9% in the past six months. The company has been able to cushion the downsides in cigarette sales with strides in the smokeless arena and other low nicotine products. Further, efficient cigarette pricing strategies have been a positive.

Wrapping it up, although e-cigarettes and other reduced-risk products have long been viewed as the future for tobacco companies, the recent FDA moves have made things ambiguous. Companies are now required to come out with foolproof ways to prevent the usage of e-cigarettes among youngsters, failing which they have to face severe actions. That said, let’s wait and watch what lies ahead for the players in the tobacco space.

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