Shares of the world’s largest tobacco companies fell during Wednesday’s session after news broke of a new Food and Drug Administration (FDA) investigation into vaping. Several stocks – including U.S.-based Altria Group Inc. (MO) and U.K.-based Imperial Brands Plc. – fell to more than one-month lows.
Tobacco stocks have always been the de facto “black sheep” of the market due to consistent concerns for decades now surrounding tobacco’s negative health effects. With Wednesday’s investigation now out in the open, investors want to know if it’s just another government intervention that will be swept under the rug or if it could have a more prolonged impact on tobacco firms’ bottom lines.
Here’s what the FDA announced on Wednesday – and what it could mean for the tobacco sector moving forward…
Early Wednesday morning, the FDA said it is investigating 35 reports filed since 2010 of people who experienced seizures after using electronic cigarette devices. While the agency was clear in stating that the connection between the 35 cases and vaping remains hazy, officials nonetheless remain committed to figuring out if the high concentrations of nicotine contained in e-cigarettes caused the episodes “because as a public health agency, it’s our job to communicate about potential safety concerns associated with the products we regulate,” outgoing FDA Commissioner Scott Gottlieb and Principal Deputy Commissioner Amy Abernethy noted in an official statement.
The 35 reports had mixed circumstances, with some people noting it was their first time vaping and others saying they were regular users. And while the FDA explained that the onset of seizures could vary by e-cigarette since different models dispense varying amounts of nicotine, some of the reports indicated the victims have a prior history of epilepsy. The agency noted it has yet to establish a clear pattern behind the incidents.
How Investors Reacted
Altria was the biggest loser on the S&P 500, as shares went from $56.69 to $53.98 during Wednesday’s session for a total decline of 4.8%. However, MO stock is still up 9.3% year-to-date since closing at $49.39 on Dec. 31. Other laggards included Philip Morris International Inc. (PM) – which tumbled 2.5% from $88.01 to $85.81 – and Vector Group Ltd. (VGR) – which only declined 0.9% from $10.69 to $10.59. Two of the worst performers on London’s FTSE 100 exchange were Imperial Brands and British American Tobacco Plc., whose shares fell 4.1% and 1.9%, respectively.
The Bigger Picture
The shift from traditional cigarettes to e-cigarettes has been happening for years now, but the public health crisis surrounding the former has only really kicked in over the last year thanks to the explosive popularity of e-cigarette firm Juul Labs, which Altria has a 35% stake in.
It took no time at all for Juul to become the vaping market’s most dominant force. The company reported a measly $200 million in 2017. Last year, the firm’s annual revenue skyrocketed to a whopping 550% to $1.3 billion and, as of this year, corners more than 70% of the U.S. e-cigarette market. In February, Juul Labs said it expects revenue to nearly double to $3.4 billion in 2019. Not to mention the company appears to be heading in the direction of an initial public offering (IPO), with numbers from last summer showing it raising $1.2 billion in VC funding at a $15 billion valuation.
But the company’s quick growth made the FDA take notice even quicker, particularly due to the product’s high popularity among underage users. Last September, the FDA started cracking down on Juul sales by sending warning letters to over 1,000 retailers in what the agency itself called “the largest coordinated enforcement effort in the FDA’s history.” Two months later, Juul Labs announced it would suspend the sale of most of its flavored e-cigarette pods in retail stores. The flavored pods, according to the FDA, are largely responsible for the unhealthy rise in underage vaping.
Even in the wake of last fall’s kerfuffle, majority Juul owner Altria doesn’t appear to be sweating the FDA’s intervention. The firm’s attitude toward the ordeal is abundantly clear in the fact that it purchased the 35% stake in Juul last December long after the FDA crusade began. Since no reasonable company would shell out $12.8 billion for a lost cause – after all, the 35% stake was considered “the biggest investment ever in a U.S. venture-backed company” by the Silicon Valley Journal – it seems Altria officials confidently believe Juul to be a healthy long-term investment, regardless of any potential counter-moves by the federal government.
While the tobacco industry formerly benefited from successful government lobbying in decades past, the tides have clearly turned in recent years. The industry is now in the government’s crosshairs as more and more research comes to light regarding just how bad tobacco use is for human health.
On the whole, tobacco companies appear to be moving further into the vaping industry while traditional smoking falls out of fashion. Any investor looking to profit from an exciting new growth industry like e-cigarettes should consider holding Altria or any other tobacco stock for the long term. However, be aware that intermittent FDA probes – such as the one announced on Wednesday – may jerk the stock price around in the short term.