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How Will Biden’s Attack on Cigarettes Impact Altria Group?
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How Will Biden’s Attack on Cigarettes Impact Altria Group?

Story Highlights

Biden says he wants to reduce the nicotine in cigarettes to make them less addictive. Meanwhile, Altria Group, a major cigarette manufacturer in the U.S., says the underlying research is questionable.

In an effort to curb smoking, the Biden administration is expected to issue a new ruling requiring tobacco companies to reduce nicotine levels in cigarettes sold in the U.S. to minimally or non-addictive levels, according to the Wall Street Journal.

As a part of President Biden’s Cancer Moonshot initiative, the administration aims to reduce the cancer death rate by at least 50% over the next 25 years.

This is surely bad news for the $95 billion U.S. cigarette industry and most likely will invite huge resistance from the U.S. tobacco growers and retailers and market leaders like Altria Group Inc. (MO), Philip Morris International, Inc. (PM), among others.

The New Mandate

According to the Centers for Disease Control and Prevention (CDC), smoking causes more than 480,000 deaths in the U.S. annually. This leads to additional costs of approximately $300 billion a year in direct healthcare and lost productivity, as per the United States Food and Drug Administration (FDA).

Though smoking of cigarettes grew slightly in 2020 during the pandemic, it has decreased in the U.S. over the past several years, with 12.5% of adults smoking in the U.S. in 2020.

FDA Commissioner, Robert Califf, stated, “Lowering nicotine levels to minimally addictive or non-addictive levels would decrease the likelihood that future generations of young people become addicted to cigarettes and help more currently addicted smokers to quit.”

Notably, the new mandate will be applicable to all cigarettes sold in the U.S. Multinational tobacco companies can continue to sell full-nicotine cigarettes in other countries.

The Biden administration is also seeking to ban menthol cigarettes and review all e-cigarettes.

Altria Group

Altria Group, well-known for its Marlboro brand of cigarettes, is the largest U.S. cigarette maker, with a current market capitalization of $85 billion, and has a lot of battles to win in the coming days.

The shares have already taken a beating, down 15% over the past two weeks ever since the news of the new mandate started spreading in the first week of June.

With the majority of revenue coming from cigarettes, Altria stated that encouraging smokers to switch to less harmful options should be the preferred choice to improve public health rather than imposing a reduction on nicotine in cigarettes.

Altria’s general counsel, Murray Garnick, said, “We just think that the better way is to create a robust market of FDA-authorized smoke-free products.”

The company said that the underlying science of low-nicotine cigarettes is unconvincing. The new ruling will instead lead to a growing demand for cigarettes in the black market.

Notably, while industry leaders have started working on low-nicotine products, it may take several years for cigarette companies to develop a low-nicotine cigarette.

Wall Street’s Take

Last week, Morgan Stanley analyst Pamela Kaufman maintained a Sell rating on Altria Group with a price target of $47 (2.84% downside potential).

Turning to Wall Street, Altria Group has a Hold consensus rating based on four Buys, seven Holds, and one Sell assigned in the past three months. At $55.08, the average Altria Group price target implies 20.53% upside potential.

Decreased Hedge Fund Trading

TipRanks’ Hedge Fund Trading Activity tool shows that confidence in MO is currently Very Negative, as some of the top hedge funds that were active in the last quarter decreased their cumulative holdings by a significant 1.6 million shares.

Conclusion

Based on the historically-evident turmoil of previous governments to pass similar laws, the new policy may take many years to come into effect due to the long-drawn process. The new policy will be proposed and then opposed by market players and the general public before a final ruling comes into play.

More specifically for Altria, which was outperforming the benchmark indices so far in the year before the news of the new mandate, this is clearly a negative.

Troubled by the near-term fundamental pressures including pressures from rising gas prices and weaker consumer sentiment due to rising inflation, the recent news may not bode well for the stock in the days to come.

Disclosure

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