Analysts Weigh In On The FDA's Position On E-Cigarettes, Menthols

The Food and Drug Administration is set on introducing restrictions on the sale of electronic cigarettes, including prohibiting most flavored products in convenience stores and gas stations, The Washington Post reported Nov. 8. The Wall Street Journal followed up with its own report Friday that said the FDA could propose a ban on menthol cigarettes.

Height Securities' Stefanie Miller and Wells Fargo's Bonnie Herzog commented on recent media reports in separate research reports.

Height Says Concerns Overblown

The FDA has the authority to regulate tobacco products from the Tobacco Control Act of 2009, Miller said in a note.

The FDA could ban flavors of tobacco products, including menthol, but the Act doesn't allow the FDA to tobacco products immediately, according to Height.

A ban on menthol or other tobacco products is unlikely to occur before 2022, and the tobacco industry would likely slow down the enaction of any ban through litigation, Miller said. 

Nevertheless, last week's reports are "unwelcome news" for cigarette companies like British American Tobacco PLC BTI, Imperial Tobacco Group plc IMBBY and Altria Group Inc MO, according to Height. 

Wells Fargo: Who's At Risk?

Wells Fargo's position on menthol is that science doesn't support a point of view that menthol cigarettes are more harmful than non-menthol, Herzog said in a note.

Given the FDA's position that it will follow a science-based approach, it is unlikely the regulatory body will outright ban menthol — although a proposal to restrict or lower the levels of menthol is reasonable, the analyst said. 

Menthol cigarettes account for around 35 percent of total industry volume in the U.S., Herzog said. British American Tobacco's Reynolds brand is the largest in the menthol segment, as 55 percent of its volume in the U.S. is menthol, she said.

Approximately 21 percent of Altria's volume is menthol and it accounts for around 18 percent of total profit, while about 20 percent of Imperial Tobacco's volume is menthol, the analyst said. 

Price Action

British American Tobacco shares were down nearly 3 percent at $36.95 at the time of publication Tuesday, while Altria was down 1.4 percent at $60.34 and Imperial Tobacco was down 1.89 percent at $33.96. Philip Morris PM was down about 1.5 percent.

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