E-cigarette shop in London.MAJA SMIEJKOWSKA (Portal)
Young smokers who inhale too quickly may experience nausea and dizziness. This poses a risk for investors who are betting on anti-smoking products to boost sales of major tobacco companies such as Philip Morris International (PMI) and British American Tobacco (BAT). As countries like Australia and the United Kingdom take stricter action against e-cigarettes, snus, etc., there is a risk that the sector's good ratings will weaken.
Traditional cigarettes are hot. Social stigmatization of a product that kills eight million people a year, public bans and high taxes mean that fewer and fewer people smoke. The proportion of smokers in the US has fallen from 21% in 2005 to a record low of 11.5% in 2021. Companies have managed to compensate by raising prices for those desperate enough to keep the habit, but the long-term trend is so clear. The WHO estimates that 60 countries are on track to reduce tobacco consumption by 30% between 2010 and 2025.
For this reason, major tobacco companies have made a radical change. The industry is now turning to smokeless products like PMI's Iqos tobacco sticks, a pen-like device that delivers vapor that tastes the same as regular cigarettes but contains fewer harmful chemicals. There are also snus – small tobacco pouches worn on chewing gum – and similar nicotine pouches. There are also e-cigarettes, which are very popular among teenagers and come in a variety of flavors and colorful devices.
These products attract large tobacco companies because they are considered healthier than regular cigarettes and can therefore be sold to a much larger number of consumers. The smokeless cigarette market will reach $90 billion by 2022, and analysts expect its rapid growth to continue. According to Visible Alpha, PMI and BAT's revenue from smoke-free products will grow by 16% and 14% per year, respectively, between 2023 and 2030. BAT CEO Tadeu Marroco wants bags, pens and the like to account for 50% of sales by 2035.
These high expectations are reflected in company valuations. We need to start calculating the value of traditional companies. One example is UK-listed Imperial Brands, which has lagged behind in smoke-free products and generated more than 90% of its sales in 2022 from classic brands such as Winston or Golden Virginia. Including debt, it trades at 2.5 times 2024 sales, according to Visible Alpha. Using the same multiple, PMI's fuel business would be worth $55 billion, just under a third of the company's $188 billion value as of Dec. 12. This means that the smoke-free products business is worth 134 billion, more than nine times the revenue in 2024. By the same logic, BAT's revenue in 2024 from e-cigarettes and the like will be a multiple of almost that Estimated sevenfold. This value is higher than that of fast-growing technology companies: According to LSEG, Nasdaq 100 companies are worth, on average, about five times their sales.
However, these rosy forecasts and assessments contradict growing concerns among regulators and governments. Many politicians fear that e-cigarettes and similar products are creating a new generation of nicotine addicts. They also produce a number of dangerous chemicals such as acetaldehyde, acrolein and formaldehyde, which can cause lung and heart disease, according to the American Lung Association. So far, no product has been spared from attacks. Singapore banned vaping in 2018, fining violators up to $2,000. In 2022, the EU banned flavored heated tobacco products. In the UK, politicians are discussing making e-cigarettes only available by prescription, a measure recently introduced in Australia. Snus is now banned throughout the EU.
Outright bans are not the only threat. Tax increases are a particularly attractive weapon for governments because they allow them to replace falling tax revenues with traditional cigarettes and deter new addicts. Malaysia has introduced a tax on chewing tobacco and the UK is considering introducing a surcharge on e-cigarette products in addition to VAT. Traditional cigarettes have shown that higher taxes can weaken demand: According to the American Lung Association, every 10% price increase reduces consumption by about 4% among adults and by about 7% among youth.
As more countries jump on the regulatory and tax bandwagon, companies like PMI and BAT will suffer a double whammy. You will see how their main product, cigarettes, declines faster and how the growth rate of e-cigarettes and other new products falls short of expectations. Big tobacco's hopes for a wealthier, less regulated future may soon be dashed.
The authors are columnists for Portal Breaking Views. The opinions are yours. The translation by Carlos Gómez Abajo is the responsibility of Five days
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