FDA's Nicotine Plan Has Limited Impact on Big Tobacco
Even as smokers turn to substitutes, we expect continued industry domination.
The U.S. Food and Drug Administration has announced that it intends to lower levels of nicotine in cigarettes. We are fairly sanguine about the impact on tobacco manufacturers’ long-term cash flows, and we maintain our wide economic moat ratings and fair value estimates. Such measures are likely to accelerate the migration of smokers to substitute products, and we expect Big Tobacco to continue dominating the industry.
Although we do not believe the valuations of Altria (MO) and British American Tobacco (BTI) have been impaired by the high-single-digit amount implied by the market’s reaction, we have regarded both companies as being substantially overvalued for some time, and the correction brings the market prices more into line with our fair value estimates.