RAI Reynolds American (delisted)

The Food and Drug Administration (‘FDA’) in a recent ruling has asked the tobacco giants of United States to print the latest design set by the council on their cigarette packets from October 2011. Graphic design of a dead body, cancerous lungs and rotten teeth would definitely be a scary intimidation for US tobacco lovers each time they pick up a packet of their favorite brands.

The label has been designed keeping in tune with the ‘Family Smoking Prevention and Tobacco Control Act’ to convey the health hazards of smoking. The act gives FDA the authority to restrict the tobacco industry’s efforts to tap children, ban the introduction of flavored tobacco products, cut out misleading terms such as “light and “low,” propagate larger and more effective warning labels and ask for a detailed information about all ingredients as well as additives.

FDA estimates to cut the smoking population by 213,000 in 2013 by using labels that would induce fear and disgust among Americans and discourage them from lighting up.

In America, smoking population shrunk dramatically since 1970, from nearly 40 percent to about 20 percent. But the rate appeared to stall since about 2004, with about 46 million adults still into smoking. Analysts feel that the rate hasn't budged owing to tobacco company’s discount coupons on cigarettes and lack of funding for anti-smoking programs.

In recent years, more than 40 countries or jurisdictions have introduced labels similar to those created by the FDA. The World Health Organization, after a survey in countries using graphic labels, revealed that the visibility of the label was much higher and almost 25 percent had responded by opting to quit soon.

United States had been using some of the most weak cigarette warnings in the world, unlike other big nations like Uruguay, Brazil and Canada. After Canada issued the first of its kind law in 2000 about affixing warnings in cigarette packs, smoking rate fell to 20% from 26%.

The council selected nine images out of 36 proposed last year. The warnings will occupy the entire top half, both front and back, of a pack of cigarettes. They must also constitute 20 percent of all advertisements.

The new label is  already being questioned in a federal lawsuit filed by some of the major tobacco companies like Reynolds American Inc. (RAI) and Lorillard Inc. (LO), who argue that the warnings will push the brand name to the bottom half of the cigarette packages, making it obscure.

Philip Morris International (PM), which only sells cigarettes outside the U.S. would therefore not be affected by the FDA's new graphic label mandates. All the tobacco giants are experiencing the pressure of the new ruling of FDA.

However, Reynolds American and Lorillard holds Zacks #2 Rank, which translates into a short-term ‘Buy’ rating, Philip Morris holds a Zacks #3 Rank, translating into a short-term ‘Hold’ rating.

 
LORILLARD CO (LO): Free Stock Analysis Report
 
PHILIP MORRIS (PM): Free Stock Analysis Report
 
REYNOLDS AMER (RAI): Free Stock Analysis Report
 
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