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British American Tobacco shares plunge to lowest level in 3 years

Nov 12 2018 13:28
Thomas Mulier and William Mathis, Bloomberg

British American Tobacco [JSE:BTI] shares plunged to the lowest level in three years on news of a possible ban on menthol cigarettes in the US, which would eliminate a product that generates as much as one-quarter of the company’s profit.

The stock fell as much as 11% in London, destroying £8.4bn ($10.8bn) of market value. US Food and Drug Administration (FDA) Commissioner Scott Gottlieb plans to pursue new restrictions on tobacco, the Wall Street Journal reported late on Friday, citing senior agency officials. That could eliminate a loophole in a flavor ban that has allowed menthol cigarettes to continue to be sold.

“BAT is the most exposed name to the potential risk,” wrote Richard Taylor, an analyst at Morgan Stanley who estimates that US menthol cigarettes account for 25% of total earnings.

The potential ban steps up the FDA’s campaign against youth smoking. Clove cigarettes were previously taken off the market, and now the agency is taking a tougher approach to alternatives, too. The FDA may impose limits on the sale of most e-cigarette products in the US, the Washington Post reported last week.

The FDA has been targeting flavored tobacco products as studies indicate that teens who smoke menthol cigarettes consumed close to twice as many weekly compared with non-menthol users. Not all analysts think a ban is likely. Jefferies analyst Owen Bennett said such a move is improbable and would take years to implement.

Lucky Strike

The decline in BAT shares illustrates that while the Lucky Strike maker is expanding into vapor and heated tobacco products, the company is still very much a cigarette business. Traditional products make up most of its revenue. The company didn’t immediately respond to a request for comment.

BAT shares have dropped 40% this year, the biggest drop in at least two decades. They have had only two annual declines in the past 19 years.

Imperial Brands declined as much as 5%. The Winston maker gets about 15% of earnings from menthol cigarettes in the US, according to Jefferies. The proportion is about 20% for Altria Group, which sells Marlboro in that market, according to the firm.

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