Big Tobacco Takes A Big Hit (MO) (PM) (BTI) (Revised)

Since Friday, Altria Group Inc. (NYSE:MO) , Philip Morris International Inc. (NYSE:PM) , and British American Tobacco (LON:BATS) PLC (NYSE:BTI) have all fallen 5.1%, 5.9%, and 5.7% respectively as of market close on Wednesday, May 29. And all three firms opened with little change on Thursday.

Nielsen released data Tuesday showing the worst falloff in four years in terms of cigarette sales and volume. Sales fell 6.9% and cigarette volume, the number of packs of cigarettes sold, slipped 11.2%.

New Lawsuits

This report came a week after Brazil’s attorney general’s office sued both British American Tobacco and Philip Morris International, who shares the Marlboro brand and works closely with Altria. The lawsuit seeks compensation for the costs of treating patients with 26 diseases related to tobacco and cigarette smoke exposure. The results of this lawsuit could have severe implications as a verdict against the companies could be the start of lawsuits from many countries across the globe.

Shrinking Markets

To add to the problems for big tobacco companies, smoking worldwide is decreasing as many people realize the health hazards. Meanwhile, e-cigarettes have taken over as a less hazardous alternative. Altria has capitalized on the growing e-cig market by taking a 35% stake in Juul Labs for roughly $13 billion. Juul currently makes up over 70% of the US e-cig market, which makes it difficult for any of the traditional cigarette companies to capture a large share of this newly coveted market.

Although these companies are primarily kept alive by traditional cigarette sales, they have tried to establish e-cig revenue streams. British American Tobacco has the second largest US market share with their e-cig brand Vuse. The firm may have the second largest market share, but this share is not very big and may continue to shrink as Juul dominates the market.

Philip Morris International has found some success in cigarette alternatives as its tobacco heating product, IQOS, has taken over the Japanese market. This device heats tobacco rather than burning it, making it theoretically less harmful than traditional smoking.

Philip Morris International has started to bring the product to other Asian and European countries. The FDA has also approved the product to be sold in the US. It will be sold by Altria as Philip Morris USA is a subsidiary of Altria. Altria and Philip Morris International await approval by the FDA to sell the product with a "Modified Risk" label which would significantly boost its appeal to consumers.

Outlook

Historically, big tobacco companies have been a pretty safe investment and have provided a solid ROI. That may not be the case for much longer as cigarette use worldwide is decreasing and many countries are adopting stricter policies for both smokers and tobacco companies. The outcome of the Brazil lawsuit will provide a lot of information as to the future of tobacco companies as a verdict against them could be devastating.

Big tobacco companies are losing many of their customers to e-cig companies and many would-be customers now take up e-cigs instead of cigarettes. The shrinking market, increased pressure from governments, and a potentially litigious future may make big tobacco companies a risky part of a portfolio. And with cigarette alternatives slowly becoming their main source of revenue there is skepticism about these tobacco firms’ futures.

Altria seems to be the company best set up to succeed of the three as its investment in Juul and relationship with Philip Morris means it has two different stakes in the cigarette alternative market.

We are reissuing this article to correct a mistake. The original article, issued May 30, 2019, should no longer be relied upon.

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