"For decades, it seems nothing has been able to hold back the tobacco industry," says Tara Lachapelle on Bloomberg Gadfly. "That was until Friday," when more than $50bn of market value in three American tobacco companies briefly went up in smoke following news that the US Food and Drug Administration (FDA) is seeking to lower nicotine in cigarettes to non-addictive levels. The shares of Altria Group, maker of Marlboro, fell 9.5%, while British American Tobacco's fell 6.8%. For both companies, it was the biggest one-day drop since 2008. Philip Morris International shares also dipped, but later recovered.
However, the measures "may never be enacted due to effective lobbying or legal challenges", says Spencer Jakab in The Wall Street Journal. Even if they are, they take time, during which tobacco firms will continue to rake in profits. Also, as analysts at Wells Fargo point out, this could be "an opportunity for reduced-risk products", such as vapour inhalers.
The number of smokers in the US is falling, but industry revenues have risen thanks to higher prices, says the FT's Lex column. Last year, volume sales fell 2% while their value rose 1% to $94.4bn. After last week's losses, Altria and Philip Morris still had forward price-earnings ratios of more than 20. "It's worth questioning whether tobacco stocks still deserve their premium valuations for such slow, if not uncertain, growth,"says Lachapelle.
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