Smokeless tobacco products have come under fire after a report by key advisory to Food and Drug Administration(FDA) alleged that tobacco companies do not have sufficient scientific evidence to prove they are less harmful to health than cigarettes.  This can be detrimental for Altria Group (NYSE:MO) as smokeless tobacco is the only segment that has been growing for the company in the past several quarters. The company competes with Reynolds American (NYSE:RAI) and Lorillard (NYSE:LO), two of its biggest competitors in the U.S.
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Tobacco Companies Claim Otherwise
Tobacco companies claim the smokeless products are less harmful than cigarettes since they do not release carcinogens through combustion. In fact, Reynolds American attempted to get the warning label for smokeless products to change to “No tobacco product is safe, but this product presents substantially lower risks to health than cigarettes.” Currently, the warning reads “This product is not a safe alternative to cigarettes.”  The report advises FDA to approve third party bodies which can independently research on the effects of smokeless tobacco products.
So Far So Good
The sales of smokeless products grew by 14% in 2010 and is expected to grow by 9% this year. Since they are smoke-free, their usage is not restricted only to smoking zones. These are also a hit with the retailers as they enjoy margins as high as 30%.  Altria operates in the smokeless tobacco segment through Copenhagen, Skoal and Red Seal.
As per our estimates, smokeless tobacco products constitute 15% of Altria’s stock price while cigarettes constitute 73%.
Cigarette consumption is on a decline in the U.S. as tobacco companies are left with no option but to pass on the tax increases to consumers. Smokeless tobacco products is the segment that offers a significant growth potential for Altria. We expect the size of smokeless products to grow at an annual rate of 7% over the next few years.
We have a $31 price estimate for Altria, which is about 10% above the market price.Notes:
- Report: Too Little Known on Smokeless-Tobacco Risk, WSJ, December 15, 2011 [↩] [↩]
- Smokeless Sales Show No Signs of Dipping, csdecisions.com, December 2, 2011 [↩]