New regulations that President Joe Biden is considering for cigarettes would completely alter the tobacco industry. By banning menthol cigarettes and lowering nicotine levels to negligible levels, it would hasten the secular decline in smoking that the cigarette companies are already experiencing.
While all manufacturers would be affected by the proposals, Altria (MO -0.06%) would arguably feel the effects most as the largest U.S. manufacturer. Meanwhile, menthol cigarettes are British American Tobacco's (BTI -0.70%) biggest market, and a ban would materially affect its operations and financial position since the Newport brand represents a significant portion of total sales.
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Yet each tobacco company has invested considerable money in reduced-risk products, and each is planning for the day when traditional cigarettes account for just a small percentage of revenue. So the overall impact may not be as great, or as long-lasting, as feared.
Let's take a look at why investors might want to consider buying tobacco stocks on any weakness they experience as new regulatory regimes are discussed.
Why Altria is a buy
Financially, Altria has the most at stake. It's wholly reliant upon the U.S. market for its $26 billion in revenue, smokeable products represent 88% of its total, and its top-selling Marlboro brand owns an industry-leading 43% share of the retail market (Newport is a distant second with a 17% share).
Yet Altria also has a full complement of cigarette alternatives that can help offset whatever decline it experiences in cigarette sales.
The obvious first line of defense would be Philip Morris International's IQOS heated tobacco device, which Altria is responsible for manufacturing, marketing, and selling in the U.S. While the tobacco giant has slow-walked the rollout of the device -- it's only in a handful of markets despite Philip Morris having received a marketing order from the Food and Drug Administration in 2019 and a reduced-risk label last year -- Altria plans on going national with it this year.
It also owns a 38% stake in Juul Labs, still the leading electronic cigarette in the U.S. despite all the attacks it's withstood for allegedly contributing to teen vaping growth (Altria and Juul are being sued for purported fraud related to teen vaping).
Then there's the potential for its partnership with marijuana producer Cronos Group, its otherwise forgotten investment.
Altria has also invested in other fast-growing smoke-free products, such as developing snus, nicotine lozenges and pouches, and more. Some of these show promise as smokers look for alternatives to cigarettes. Snus, for example, are big in some international markets and are starting to see big gains here now.
Why British American Tobacco is a buy
Like Altria, British American Tobacco has a lot to lose by the proposed new regulations, but it has also invested billions of dollars in developing smoking alternatives.
The company's Vuse, for example, is the second-largest e-cig on the market and has been one of the big beneficiaries of Juul's woes, and now has a 36% share of the market. And though the tobacco company took its time to enter the marijuana market, it hasn't really missed out by doing so, and the potential for blending marijuana with vaping gives it a unique opportunity to surpass its rivals who entered earlier.
This year, British American will be rolling out nationally in the U.K. its Vuse CBD Zone vaping device, a niche of the cannabis market that has huge potential.
As the world's largest publicly traded international tobacco company, British American has also put a lot of time and money in reduced-risk products. Some 10% of its revenue comes from non-combustible products and it has 13.5 million customers of them as a foundation to build upon.
It is looking to grow that number to 50 million by 2030, and hopes to see revenue from these new product categories jump to $5 billion by 2025.
The future is smoke-free
Philip Morris International still gets derided by anti-smoking activists for its claim that it wants a smoke-free world, but it's the tobacco companies themselves who are advancing the concept.
No doubt if Biden's new regulations come to pass, Altria, British American, and other smaller outfits would be significantly harmed by them in the short term.
Savvy investors, though, should also see that the profits cigarette companies make today off of smoking are being invested in a future where the harm from their products is substantially lowered. Any weakness in their stock prices should be seen as an opportunity to buy the tobacco stocks at a discount and reap the rewards as their cigarette alternatives are moved to the forefront.
