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Big Value in Big Tobacco

Potential vaping regulations have limited impact on our valuations.

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The only surprise about President Donald Trump’s proposal to ban non-tobacco-flavored vaping liquids is that it took so long. We believe vaping regulation is still in its early stages, and future developments could include higher taxes and control over ingredients. Nevertheless, Trump’s proposal significantly accelerates U.S. regulation and could decimate the category in a few years.

We are retaining our fair value estimates for all the tobacco companies we cover until we know more about the extent and timing of any regulation, but our worst-case scenario analysis shows that Altria (MO) is the most affected, having recently acquired 35% of Juul, while this latest development is probably a net positive for Philip Morris International (PM). We believe there is significant value in the group at present. We see particular upside to Imperial Brands (IMBBY) and British American Tobacco (BTI), while Philip Morris is our quality pick for its leadership position in heated tobacco and strong combustible portfolio.

Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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