Young smokers who inhale too quickly may feel nauseous and dizzy. This poses a risk to investors betting on anti-smoking products to boost sales for big tobacco companies such as Philip Morris International (PMI) and British American Tobacco (BAT). With countries such as Australia and the United Kingdom clamping down on vapes, snus and the like, there is a danger that the sector's good ratings could fade away.
Traditional cigarettes are hot. The social stigma against a product that kills 8 million people a year, public prohibitions and high taxes mean that fewer and fewer people smoke. The proportion of smokers in the US had fallen to a record low of 11.5% in 2021, from 21% in 2005. Companies have managed to compensate by raising prices for those desperate enough to keep up the habit, but the long-term trend is clear. The WHO estimates that 60 countries are on track to achieve a 30% reduction in tobacco consumption between 2010 and 2025.
For this reason, big tobacco companies have made a radical turn. The industry is now relying on smokeless products, such as PMI's Iqos tobacco sticks, a pen-like device that releases vapor that tastes the same as regular cigarettes, but with fewer harmful chemicals. There is also snus – small tobacco pouches that are worn on the gum – and similar nicotine pouches. There is also vaping, very popular among teenagers, and which comes in a wide variety of flavors and colorful devices.
These products attract big tobacco companies because they are considered healthier than regular cigarettes, meaning they can be sold to a much larger number of consumers. The smokeless cigarette market will reach $90 billion by 2022, and analysts estimate its rapid growth will continue. According to Visible Alpha, PMI and BAT's revenue from smokeless products will grow by 16% and 14% a year, respectively, between 2023 and 2030. BAT CEO Tadeu Marroco wants bags, pens and the like represent 50% of sales in 2035.
These high expectations are reflected in company valuations. We must start by calculating the value of traditional businesses. An example is Imperial Brands, listed in the United Kingdom, lagging behind in smokeless products and which in 2022 obtained more than 90% of its revenue from classic brands such as Winston or Golden Virginia. Including debt, it trades at 2.5 times 2024 sales, according to Visible Alpha. Using that same multiple, PMI's fuel business would be worth $55 billion, just under a third of its enterprise value as of December 12, of $188 billion. This implies that its smokeless products business is worth 134 billion, more than 9 times 2024 sales. By the same logic, BAT's 2024 revenue from vaping and the like is valued at a multiple of almost 7 times. This figure is higher than that of rapidly growing technology companies: Nasdaq 100 companies are worth on average about 5 times sales, according to LSEG.
But these rosy forecasts and assessments clash with the growing concern of 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 the American Lung Association says can cause lung and heart disease. So far, no product is exempt from attacks. Singapore banned vaping in 2018 and fines violators up to $2,000. In 2022, the EU banned flavored heated tobacco products. In the United Kingdom, politicians are debating making vaping only available by prescription, a measure Australia recently introduced. Meanwhile, snus is banned throughout the EU.
Outright bans are not the only threat. Increasing taxes is a particularly attractive weapon for governments, as it allows them to replace revenue from falling tax collection with traditional cigarettes and deter new addicts. Malaysia has introduced a tax on chewing tobacco and the United Kingdom is considering adding a surcharge on vaping products in addition to VAT. Traditional cigarettes have shown that higher taxes can weaken demand: according to the American Lung Association, each 10% increase in price reduces consumption by around 4% in adults and 7% in youth.
If more countries jump on the regulation and tax bandwagon, firms like PMI and BAT will suffer a double blow. They will see how their main product, cigarettes, falls more rapidly, and how the growth rate of vaping and other new products does not meet expectations. Big Tobacco's hopes for a more prosperous, less regulated future could soon be burned.
The authors are columnists for Reuters Breakingviews. The opinions are yours. The translation, of Carlos Gomez Belowit is the responsibility of Five days
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