Tobacco Sector To Be Pressured By Boost In Tobacco Taxes
February 04 2009 - 2:45PM
Dow Jones News
The passage of legislation to expand a government children's
health program will put fresh pressure on the U.S. tobacco
industry.
The House on Wednesday passed legislation that allows for an
expansion in the state children's health insurance program,
clearing the way for President Barack Obama's signature later in
the day. The bill is financed by an increase in tobacco taxes,
including a 61-cent-per-pack increase in cigarette taxes that would
raise the federal excise tax on a pack of cigarettes to $1.
The higher taxes are a blow to the U.S. tobacco industry, which
in recent years has already seen cigarette volumes slide. Higher
taxes tend to put further pressure on volumes as they increase the
cost of cigarettes. Volumes at U.S. cigarette makers Altria Group
Inc. (MO), Reynolds American Inc. (RAI) and Lorillard Inc. (LO) are
likely to suffer further.
Charles Norton, a portfolio manager at the Vice Fund, which
invests in tobacco stocks, says he expects overall cigarette
volumes in the U.S. to be down in the "high-single-digit range" in
2009.
Still, tobacco stocks did not show much of a reaction to news of
the bill's passage Wednesday since investors have been gearing
themselves up for the change since late last year. Altria was down
1% to $16.76 and Reynolds was up 1 cent to $38.78
Industry watchers expect tobacco makers with the strongest
brands - like Marlboro maker Altria - to be the most successful in
withstanding the pressures of the increased levy.
"In our view Altria is best positioned to weather the U.S.
cigarette headwinds of excise tax increases and eventual FDA
regulation, due to its pricing and market-share leadership," wrote
JPMorgan analyst Erik Bloomquist in a recent research note to
investors.
Citgroup said in a recent note that the moist smokeless tobacco
sector, where taxes will also rise, will gain as a category because
the tax there is still relatively low. Among makers of smokeless
tobacco are Altria's newly purchased UST unit, which sells brands
like Coppenhagen and Skoal, as well as Reynolds American's Conwood
unit, which sells names like Kodiak and Grizzly.
Citigroup also noted that the tax increases will pressure
cigars, which could become more expensive for consumers and could
lose some of their tax advantage over cigarettes.
Norton is hoping the cigarette companies will be able to offset
the pressures of lower volumes by eventually tacking on their own
price increases that can help raise their profits.
"A lot of it will be recovered in price - they have strong
pricing power," said Norton. "In terms of the stocks, a lot of it
is well know."
-Anjali Cordeiro; Dow Jones Newswires; 201-938-2408;
anjali.cordeiro@dowjones.com
(Fawn Johnson contributed to this article)