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Vaping woes are putting the industry under real pressure
Thursday 03 Oct 2019 Author: James Crux

The defensive attractions of the tobacco sector, traditionally owned for its earnings resilience and rising dividends, appear to be wafting away amid increasing political and regulatory concerns over vaping.

The promise of tighter rules on the vaping sector is bad news for the tobacco giants which have bet big on vaping and other smokeless alternatives replacing shrinking cigarette profit pools.

Marlboro-maker Philip Morris International and Altria have ended talks over their mooted $187bn merger amid rising regulatory risk around Juul Labs, the vaping upstart in which Altria owns a 35% stake.

Juul has replaced co-founder Kevin Burns as CEO with K.C. Crosthwaite, a Philip Morris veteran and most recently Altria’s chief strategy and growth officer, having been hit by sales bans triggered by unexplained respiratory illness among vapers and US scrutiny amidst a teenage e-cigarettes epidemic.

The replacement of Burns with Crosthwaite signals Altria’s growing influence over Juul after its $12.8bn investment last December, with the e-cigarettes firm also suspending all broadcast, print and digital advertising in the US amid vaping hysteria across the pond.

The Trump administration plans to remove all flavoured e-cigarettes from store shelves due to rising popularity among the youth demographic, while South Korea and India have become the latest countries to ban or warn about the sale of e-cigarettes.

Here, Imperial Brands’ (IMB) shares cratered after the Davidoff, Gauloises Blondes and blu maker coughed up a profit warning (26 Sep).

Imperial Brands cut its year-to-September 2019 sales growth guidance from 2.5% to ‘around 2%’ and is now guiding to flat annual earnings per share, blaming US vaping hysteria for lower than expected growth in less harmful next-generation products, as well as a competitive Australian market, for the earnings alert.

Specifically, Imperial’s overall next generation product business is expected to grow by around 50% this year, below management expectations with the US market slowdown sapping demand for its myblu vape brand.

A number of wholesalers and retailers are not ordering or not allowing the promotion of vaping products.

Uncertainty over the future of vaping also weighs on the valuation of British American Tobacco (BATS), which recently outlined plans (12 Sep) to simplify its business and boost growth in new categories such as vapour, tobacco heating products and oral tobacco.

Recent developments may give pause for thought for investors attracted by the forward price-to-earnings ratios of 6.0 and 8.3 on offer at Imperial Brands and British American Tobacco respectively. 

These are cheap ratings but they could get even cheaper judging by the perfect storm engulfing the sector.

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