Big Tobacco’s smoke-free rush may soon burn out

Artificial high. Teenage smokers who inhale too quickly can feel nauseous and dizzy. That’s a risk for investors banking on smoke-free products to turbocharge sales of Big Tobacco stocks like Philip Morris International and British American Tobacco. With countries from Australia to UK clamping down on vapes, snus and like, re’s a danger sector’s rosy valuations go up in smoke.

Tritional cigarettes are burning down to ir butts. Social stigma against a product that kills 8 million people a year, public bans, and high taxes all mean that fewer and fewer people smoke. proportion of U.S. smokers h fallen to a record low of 11.5% as of 2021, from 21% in 2005. Companies have managed to compensate by whacking up prices on those desperate enough to keep up habit, but long-term trend is clear. World Health Organization reckons 60 countries are on track to reach a 30% reduction in tobacco use between 2010 and 2025.

Big Tobacco has refore embarked on a dramatic pivot. industry’s hope is now on smokeless products like PMI’s IQOS tobacco sticks, a pen-like device which releases a vapor that tastes like regular cigarettes but has fewer harmful chemicals. re’s also snus – tiny tobacco sachets worn on gum – and similar nicotine pouches. n re’s vaping, popular with teenagers, which comes in a variety of flavours and colourful devices.

se products appeal to Big Tobacco because y are deemed healthier than ordinary cigarettes, which means y can be sold to a much larger pool of consumers. smokeless market reached some $90 billion in 2022, and analysts reckon its rapid growth will continue. PMI and BAT’s revenue from smoke-free goods is set to grow by 16% and 14% a year respectively between 2023 and 2030, according to Visible Alpha forecasts. BAT Chief Executive Teu Marroco said in December that he wants pouches, pens and like to make up 50% of sales by 2035.

Such toppy growth expectations are baked into tobacco company valuations. Start by working out what tritional cigarette businesses are worth. One yardstick is UK-listed Imperial Brands, which is a laggard in smoke-free products and last year me over 90% of its revenue from tritional tobacco brands like Winston or Golden Virginia. Including debt, it is currently tring at 2.5 times 2024 sales, per Visible Alpha data. Using that same multiple, PMI’s combustible business would be worth $55 billion, or just under a third of its $188 billion enterprise value. That implies that smoke-free business is worth $134 billion, over 9 times 2024 sales, again using Visible Alpha data. On that same logic, BAT’s 2024 revenue from vaping and similar products is valued on a multiple of nearly 7 times. That’s above where fast-growing technology groups tre: companies in Nasdaq 100 Index are on average worth around 5 times sales, according to LSEG data.

se rosy forecasts and valuations, however, are at odds with growing concerns from regulators and governments. Many politicians fear e-cigarettes and similar products are creating a new generation of nicotine dicts. y also produce a number of dangerous chemicals, including acetaldehyde, acrolein and formaldehyde, which American Lung Association says can cause lung as well as heart disease. So far, no product is exempt from attacks. Singapore banned vaping in 2018 and fines offenders up to $2,000. Last year, European Union banned flavoured heated tobacco products. In UK politicians are discussing making vapes only available to people with a doctor’s prescription, a measure Australia recently introduced. Meanwhile, snus is banned across EU.

Outright bans are not only threat. Raising taxes is a particularly attractive weapon for governments, as it allows m both to replace revenue from lower levies on tritional cigarettes and discourage new dicts. Malaysia has introduced a tax on chewing tobacco and UK is considering ding an extra charge on vaping products on top of VAT. Tritional cigarettes have shown that higher taxes can cripple demand: according to American Lung Association every 10% increase in price of cigarettes reduces consumption by about 4% in ults and about 7% in young people.

If more countries pile on regulation and tax bandwagon, likes of PMI and BAT face a double blow. y will see ir core product of cigarettes diminish more quickly, and pace of growth in ir vaping and or new products fail to live up to expectations. Big Tobacco’s hopes for a more prosperous and less regulated future may soon burn out.

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British American Tobacco on Dec. 6 said it plans to build a “smokeless world” and to generate 50% of company’s revenue from non-tritional cigarettes by 2035. London-listed company also announced a $31.5 billion impairment on some U.S. cigarette brands at its full-year pre-close tring update. maker of Lucky Strike cigarettes maintained its full-year revenue growth forecast at 3%-5% in constant currency, but said it expects it to be at lower end of this range. BAT also said it expects low-single-digit growth in revenue and justed profit from operations in 2024.

Author: Aimee Donnellan