Judgement Day for Menthol Cigarettes Is Getting Close

Does Lorillard's (NYSE: LO  ) exposure to the highly scrutinized menthol-cigarette market pose a problem?

This is the question that many investors have been asking for some time and it seems as if they are going to get an answer very soon.

The menthol debate has been raging for some years now, but the U.S. Food and Drug Administration finally decided to make a stand this year, starting a 60-day public comment period back in July, which was intended to help inform the rule-making decision. However, the agency received requests that 60 days was not long enough to make an informed decision, so this deadline was extended to Nov. 22. Now that this period has ended, the FDA needs to make up its mind. 

Unfortunately, Lorillard's future is dependent upon the FDA's decision, as, according to Citi analyst Vivien Azer, about 90% of Lorillard's sales volume comes from menthol cigarettes. 

Meanwhile, Altria Group (NYSE: MO  ) sells menthol versions of Marlboro and Reynolds American'  (NYSE: RAI  ) menthol offering is Camel, Kool, and Salem. Still, Reynolds' and Altria's exposure to the menthol market is nowhere near as troubling as that of Lorillard's. Specifically, Altria's menthol Marlboro's only account for around 20% of total sales and Reynolds' menthol brands only account for 30% of the company's overall sales.

So what are the two sides to the argument?

The argument against
Tobacco is usually a touchy subject when it comes to ethics, but when taking about menthol, the situation becomes extremely complicated. Not only are menthol cigarettes blamed for converting youngsters to the habit of smoking, but they are also popular among African-American smokers, which has fired up the race debate. In particular, 83% of African-American smokers use menthol cigarettes; by comparison, just 24% of white smokers use menthol cigarettes. Furthermore, there are some claims that three-quarters of African-American children and more than half of Asian and Hispanic children smoke menthol cigarettes. 

But perhaps the strongest argument against menthol cigarettes is the revelation that younger smokers prefer the 'softer' menthol flavor. So, with 88% of adult smokers claiming that they started smoking before the age of 18, menthol products become a big target in the war against tobacco.

What's more, Congress has already banned the addition of flavorings to cigarettes; they did this back in 2009 with the sole exemption of menthol. So why should it be exempt? In addition, the European Parliament recently introduced a law banning the sale of menthol cigarettes from 2022 -- this increases pressure on the United States to act.

All in all, there is some solid reasoning behind the FDA's prospective menthol ban.

The argument for menthol
However, every debate always has two sides and in this case, the argument to keep menthol products is supported by law enforcement agencies.

In particular, recent comments made by law enforcement agencies against the regulation of menthol products have started to sway the balance in favor of big tobacco. Specifically, law enforcement agencies are concerned that a ban on menthol cigarettes could lead to a rise in organized crime and black-market activity.

Previously, similar claims by big tobacco have been rejected by the FDA as a ploy and scare tactic to limit regulation. However, these new remarks come from Paul Carey III, chief of enforcement for the Northern Virginia Cigarette Tax Board, and others such as the 1,000-member Alabama State Troopers Association, a former supervisory U.S. Marshal from North Carolina, and Michael Robertson, former director of the North Carolina Alcohol Law Enforcement Agency, according to CNBC.

All of this makes me think that the FDA might start taking these comments seriously. Remarks from law enforcement agencies all suggest that cigarette smuggling is an ongoing problem and is linked to violent crime; comments like this could make the FDA reconsider regulation.

This makes me think that a complete ban on menthol products may not come into force.

Judgment day
Whatever the outcome, judgment day is getting closer. With the FDA's public consultation period on the matter closed, the agency needs to make a decision soon.

Overall, I feel a complete ban on menthol products is unlikely, as although they cause problems, the risk of black-market activity is a greater risk to society. That said, the FDA could restrict menthol products in some way, perhaps dulling down the menthol flavor so they weren't so appealing. This could impact sales of Reynolds, Altria, and Lorillard. Of these three companies, Altria is least likely to be affected, so for me Altria is currently my tobacco-sector investment of choice.

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Read/Post Comments (8) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 14, 2013, at 10:44 PM, stopalready23 wrote:

    This is the type of ridiculous governmental action that gives credence to the claim of groups like the Tea Party that the government spends far too much time and our money trying to unnecessarily interfere in the lives of the American people. Is the FDA trying to create another black market opportunity for criminals? Does it honestly believe that people who like menthol will suddenly stop smoking because menthol is no longer available? Why doesn't the FDA focus on doing its real job correctly? Every day I see ads asking people if they've suffered severe side effects from various drugs - all approved by the FDA. It's as though the FDA is trying to keep business flowing to personal injury attorneys. This is one government agency that needs to be completely reorganized.

  • Report this Comment On December 15, 2013, at 1:09 AM, IainElliott wrote:

    Thank you for spelling judgement with the medial e. Judgment looks constipated. I am automatically on your side for spelling it sensibly.

  • Report this Comment On December 15, 2013, at 2:30 AM, Lance1234 wrote:

    It would serve us well to take note of all the things in our personal and individual lives that our government has come to assert it has the Constitutional Power and Authority upon which to pass judgment, none of which is consistent with individual freedom and liberty. This is how a free people cease to exist.

  • Report this Comment On December 15, 2013, at 3:24 AM, Moefreedom wrote:

    Black smokers can give Obama credit for this since he was the one who gave them authority to regulate it in the first place. How's that hope and change working for you?

  • Report this Comment On December 15, 2013, at 11:54 AM, Kngrthr wrote:

    Government control has already crossed the line.

  • Report this Comment On December 15, 2013, at 2:33 PM, chevroletgt wrote:

    People will find a way to get their mentholated cigarettes whether menthol is banned or not. There are far less children starting to smoke than it was when I was a kid, laws aren't going to make a difference, education is the best tool to fight tobacco. However, adults should have the freedom to choose the product they want to consume, including the flavor of that product. Why tobacco? What about alcohol? It causes more trouble and is more dangerous that tobacco, yet you only see advertisements telling you not to drink and drive but that is just one way alcohol can cause harm.

    All cigarettes will be legal again and the regulations reduced.....why? Because just like with prohibition, the people will eventually ignore the law and make their own product(which can be worse than the FDA approved product).

    Why haven't legislatures learned that people are going to do what they want to do regardless of the law. That's not saying we shouldn't have laws, but some laws are too personal, too intrusive and against what constitutes a free society. We may be taking it now but one day it will backfire.

    It's not democrat or republican, both sides threaten civil liberty, they are both just as guilty as each other.

  • Report this Comment On December 16, 2013, at 12:07 AM, LibsREvil26 wrote:

    Yeah, the government is making a killing off of your health. They "Claim" to be against big-tobacco, when in fact, they are kissing their bums 100%. Even those TRUTH commercials, they are behind the big tobacco. My advice. Never smoke, never pick up a dirty cancer-stick, nor dip. Then you will be just as healthy as I am. No dirty lung, no gum or mouth diseases.

  • Report this Comment On December 16, 2013, at 6:12 AM, Gigijloo wrote:

    This is just another example of the government's attempt to control every aspect of your life. Who are they to mandate whether a person smoke menthol cigarettes or not? Also the stereotyping of claiming that underage smokers begin with menthol cigarettes because of their smoother taste and racial profiling that suggests African Americans choose to smoke menthol cigarettes vs. non menthol. Does that mean if police and detectives find menthol cigarette butts at the scene of a crime they are going to automatically decide a juvenile African American is responsible for it? I am as lily white as some people come and I've smoked menthol cigarettes all my smoking life. Mark my words...first the government issues bans on what appear to be small inconsequential activities to passing laws that ban extremely important freedoms that every American has the right to expect under our constitution.

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