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How a Vaping Ban Would Affect Big Tobacco

By Chris Hill – Sep 18, 2019 at 3:00AM

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An FDA ban on vapes would change the tobacco market in a huge way.

In this episode of MarketFoolery, host Chris Hill chats with Foolish analysts Bill Mann and Bill Barker about some market news. Altria (MO -0.96%) popped on the FDA's proposed flavored e-cig ban. But it's not entirely good news for the giant tobacco company. Meanwhile, in a baffling move, Groupon (GRPN -2.98%) announced interest in acquiring Yelp (YELP 1.72%) -- a business with a significantly larger market cap. Would two struggling online consumer goods companies become one successful one? Probably not. Meanwhile, Ohio State University failed in its attempt to trademark the word "the," and RIP T. Boone Pickens. Bill Mann shares a story from when he met the billionaire oilman. Tune in for more!

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 12, 2019.

Chris Hill: It's Thursday, Sept. 12. Welcome to MarketFoolery! I'm Chris Hill. Joining me once again in studio is Bill Mann. Also joining, from MFAM Funds, Bill Barker. Thanks for being here!

Bill Mann: You got the Bills together!

Bill Barker: Thanks for having me!

Mann: It's been a long time!

Hill: It has been a long time!

Barker: It has been, I mean, since we've been here. It was earlier this morning, when we were talking. Waiting for Chris to join us for coffee. 

Hill: I was a little late this morning. So, we've got some potential merger acquisition news. Potential. We're going to pour one out for T. Boone Pickens, and give a shout out to our neighbors at the USPTO. But we're going to start in the world of tobacco and tobacco-related products. British American Tobacco (BTI -0.81%), the parent company of cigarette brands like Lucky Strike, Kent, and Dunhill, shares of BAT are up a bit this morning after announcing that it is cutting thousands of jobs. That probably would be the lead story in tobacco and tobacco-related products were not for the fact that yesterday, the U.S. Food and Drug Administration announced a plan to ban flavored e-cigarette products. Let's start with this, Bill Mann. What was your first reaction when you saw that news?

Mann: There's a lot of talk about the fact that six people have died. It's the government, so I went straight cynical. It's like, we can't sort out when 400,000 die each year from actual tobacco products? 

Hill: Six people in Kansas. Reports of dying of what is being termed "a mystery illness," which is never a good thing.

Mann: For sure. The regulators have been nervous about the fact, and they've been onto the fact that these fruit flavors have, in a large way, attracted teens to e-cigarette smoking. Do you call it smoking? Usage?

Hill: Vaping.

Mann: I hate that word. I know, it's the word at this point.

Hill: It is the actual word, so you're just going to have to get over it.

Mann: It's like hating the word cheese. I hate that word.

Hill: Barker, we were talking earlier today; this is something that we've seen a lot of investment in. Probably no bigger investment than coming from Altria, the company formerly known as Philip Morris. Altria took a big stake in Juul. Juul is the biggest and best known brand in vaping. When this got reported, shares of Altria popped. Not a tremendous amount, but went up. That surprised me just a little bit just because, yes, Altria is a big company, and yes, they have a lot of money; but they also sunk a decent chunk of it into Juul. And, if all of the sudden, Juul and all vaping companies have an addressable market that is much, much smaller because now, instead of fruity flavors, everything tastes like a cigarette, then I would think that would not be good news for Altria.

Barker: Well, not necessarily. Altria has the approved cigarette tasting e-cig.

Mann: The only one.

Barker: If competition, being the more flavorful kinds, whatever they are, is taken away, then all that energy is going to go into the only thing you can get, which is cigarettes or their closest substitute in tobacco. My first reaction to this was more or less, "Oh, it's about time." And that's mostly speaking as a parent whose children do not vape, from what they tell me. And I believe them on this limited -- [laughs] But, who seem to be surrounded by many others who do in their grades.

Hill: Yeah. A couple of months ago, I interviewed Carl Quintanilla from CNBC. He worked on a primetime documentary about vaping. 

Mann: So well done!

Hill: I'm pretty sure they are running it again next week with updated interviews. Same thing, as a parent, it was terrifying to watch. There were a bunch of scenes that stood out, but one was Carl talking to a 16-year-old boy. And he asked him, "You've been vaping for two years. The first time you did it, what was it like?" And he was like, "Oh, it was great!" Which is, of course, the opposite of everyone's first cigarette that they ever had, which is like, "My lungs are on fire and my mouth tastes like ash."

Barker: Yeah. Cigarettes are an acquired taste. Too many people acquire that taste. But you have to push through, I think, that first couple of experiences to get that.

Mann: Yeah. There's the nicotine delivery, but the way it's done is not particularly pleasant. Well, with vaping, we've solved that, and that's not necessarily great. 

Barker: The only flavor approved for tobacco is menthol, right?

Hill: I believe that's correct.

Barker: You're an expert on this.

Hill: I'm really not.

Barker: [laughs] But, I mean, there would have been a push -- there were more flavors at one point. There was greater latitude to add flavors to tobacco. The regulators successfully put a stop to that for everything other than menthol. If Juul and the e-cig world are restricted to the great taste of tobacco, they're not going to get as many people signed on. To a non-smoker, that's a good thing. 

Mann: It's probably really bad for the mom and pop shops that have popped up everywhere, the vape shops you see everywhere. 

Barker: It just makes them sound so innocent. "The mom and pop vaping shops." [laughs] Yeah, I guess it is.

Hill: Before we move on to our next story, let's go back to British American Tobacco. When you see this news, does it make you think that tobacco stocks in general are in better shape? Are they helped by this? Does it have no effect? 

Mann: My first reaction is, make a choice: either you're British or you're American.

Hill: I was talking about all publicly traded tobacco companies, but, you know. That was helpful, too. Thanks for going immediately for that!

Barker: I don't think this has been given enough scrutiny, this British American Tobacco. You can't be both!

Mann: Should I answer the question?

Hill: Yes, please!

Mann: I think in the short term, it probably helps them. To the degree that you believe that there is a formal channel for cigarettes, for e-cigarettes, and an informal one. This impacts the informal one a lot more than it does the formal one. Longer-term, the top of the funnel might narrow a little bit if that original acquisition of nicotine through e-cigarettes is not as positive.

Hill: The Wall Street Journal is reporting that Groupon is pursuing an acquisition. The story quotes Robert Chapman, an activist investor who had built up a 1.5% stake in Groupon and appears to be selling some of that off because at least he's not crazy about the possibility that Groupon is going to make a what he calls "relatively large acquisition." And the target appears to be Yelp, which is surprising for a couple of reasons. I'm sure there are synergies that can be wrung out if these two companies get together. Let's start with the fact that Yelp is more profitable than Groupon. It's also bigger than Groupon from a market cap standpoint.

Mann: Yeah, I thought that the story had it backwards, that Yelp obviously was going to be buying Groupon. For what reason, I can't really fathom. Looking at what this would do for the company, I can't see it, other than making it larger.

Hill: Is there any reason, Barker, you think this could work?

Barker: I think it falls under the principle of "two wrongs do make a right." If you take two things as disappointing as these two companies and you put them together, then something good comes out of the situation. These have been massively disappointing investments over the last five years. I think both of them have an average return of minus 15% a year. 

Mann: Yelp from a slightly higher base.

Barker: It's a very fair fight, I would say, between who's been the worst performing stock. Maybe this is the way to solve it, it's to put them together. Maybe there's some synergies here. That's a buzzword you can always trot out when you don't know why else something is being done. 

Mann: It must be said, this is being pushed by investors. Investors are super frustrated at Groupon. Maybe they should have invested in a better business? But, be that as it may, Groupon has to do something. Its core business may not be growing at all, may be pretty stagnant. What better way to do it than to move into a different vertical? 

Hill: It seems like one of the main things that both Groupon and Yelp have going for them are the brand recognition. There seems to be a healthy number of consumers who are using both. But it also seems like these businesses would be better off if they were housed elsewhere. If instead the story was, "Alphabet is buying either Groupon or Yelp and cutting costs and building it into its network," then I think that becomes yet another profitable division within Alphabet. But, just the marriage of the two? Seems awful.

Mann: You're right that, from a brand perspective, they are each the noun of their respective segments. Maybe that's it. They feel like, from a corporate perspective, the back office stuff, there's some synergies that can be wrung out. I don't really see it.

Hill: Also a little telling that shares of Yelp are up today on this report, and shares of Groupon are down about 5%. It's like, "Hey, Yelp! There's some attractiveness there!" With Groupon, it's just like, "Oh, Lord, you're going to go out and try and buy a company bigger than yourself?"

Mann: Yeah. You can't run your own company, but let's just take another one on?

Hill: Salute to our neighbors at the U.S. Patent and Trademark Office. They're on fire this week. Smacking down Ohio State University for attempting to trademark the word "the," which, in addition to being insane, is also an insult to the many institutions of higher learning out there, including and especially The American University. 

Mann: Not to mention, the person who invented the word "the," I think, should have had some say.

Hill: I don't know who. Bill The? Also, LeBron James attempting to trademark the phrase "Taco Tuesday." I enjoy watching LeBron play basketball. I know he has a bunch of business endeavors he's doing well at. That was one I was like, "Oh, come on! Don't do that!"

Barker: I get the Ohio University move -- 

Hill: Ohio State. Ohio University is a different one.

Mann: Here comes our hate mail from today.

Barker: This is why I did this. [laughs] You don't follow? [laughs] Let me tee that up again. Anyway, they're trolling. Right? Nobody involved thought they would get away with this. There's not a single person involved. But it gets their story, their little thing out there. LeBron? I don't get that. This is not a trolling move, is it?

Hill: No.

Barker: He or his advisors believed they could pulled this off.

Hill: I would argue that Ohio State University also thought they could pull it off because they were looking to sell all this merchandise, so they had a business angle, too. 

Barker: I'm giving them more credit than you are.

Mann: It's not entirely without precedent. There are two universities with major athletic programs -- University of Southern California and the University of South Carolina. University of Southern California trademarked USC. So you won't see South Carolina referred to, ever, as USC. So, there is some precedent in that space, where merchandising and things like that are you are at play.

Hill: Did the University of South Carolina trademark Carolina? I see a lot of their merchandise that just says Carolina. You being from North Carolina --

Mann: We don't like that much.

Hill: I wouldn't think so. 

Barker: Is that the lesser Carolina?

Mann: South Carolina? Unquestionably.

Barker: OK.

Hill: [laughs] We're really going to get emails.

Barker: Looking for trolling all over the place. We've angered the smokers, Carolinians of both stripes, Ohio State...

Hill: [email protected]. Keep 'em coming, folks!

Rest in peace T. Boone Pickens. He died Wednesday at the age of 91. Noted oilman. As the Wall Street Journal wrote in the obituary, "a pioneer in hostile takeovers." Also donated somewhere in the neighborhood of half a billion dollars to his alma mater, Oklahoma State University. You got the chance to meet him. By the way, everyone who is writing about him, tweeting about him, uses the phrase "larger than life." The Dallas Morning News has a phenomenal obituary about T. Boone Pickens.

Mann: He was a classic wildcatter personality. Very personable, very positive. Probably could sell you mostly anything. Tom Gardner and Andy Cross and Morgan Housel and I, along with some other Fools, had the opportunity to go to T. Boone Pickens' offices. This was four years ago, perhaps. So, we're sitting around with Boone, and he was talking about the weight that he'd lost, and the fact that he's always been very healthy and he's worked out his entire life. He said, "You know how you can tell that someone who is older is healthy? You have to check their calves." With that, he flings his leg up onto his conference room table and encourages us to come and grab his calves, which in a lot of situations would probably be at least frowned upon, but it was just how he was.

Hill: Strong calves?

Mann: Yeah. Surprisingly supple.

Hill: For someone in his mid-80s.

Mann: I mean, I figure, if you're going in and checking out a billionaire's calves, you might as well really see what he's got going on. Yeah, pretty good.

Hill: Some invitations you just don't turn down.

Mann: No!

Barker: I feel like the adjective that he was looking for there was not supple, though. 

Mann: No, no.

Barker: Calves like iron. 

Mann: He wanted us to be like, "Those aren't calves, those are cows."

Barker: He was sort of the Bill Brzeski of corporate raiders.

Hill: I would say that's probably correct. Physically imposing person. As you said, an amazing salesman. A lot of great stories about him. Particularly when you consider that he was a pioneer in hostile takeovers, I'm sure there are some business folks out there who are --

Barker: Less charitable to him?

Hill: Yeah, they would be less charitable in their assessment of him because they were probably on the other side of those hostile takeovers.

Mann: Yeah. It is not overstating to say that he paved the way. There's a big argument now about whether shareholder capitalism is the most appropriate form or whether there's been some real damage that's caused. I think that those are probably really great arguments. But it is not by mistake, the rise of shareholder capitalism and the rise of shareholder activism happened at the same time. He was at the forefront.

Hill: All right, we'll wrap up there. Bill Mann, Bill Barker, thanks for being here, guys!

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That'll do it for this edition of MarketFoolery! The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you next week!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional. Bill Barker owns shares of Alphabet (C shares). Bill Mann has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.


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Stocks Mentioned

Yelp Inc. Stock Quote
Yelp Inc.
$34.35 (1.72%) $0.58
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$40.77 (-0.96%) $0.40
Groupon, Inc. Stock Quote
Groupon, Inc.
$8.48 (-2.98%) $0.26
British American Tobacco p.l.c. Stock Quote
British American Tobacco p.l.c.
$35.69 (-0.81%) $0.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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