Tobacco stocks slump after report says the FDA is considering a ban on menthol cigarettes

  • The Food and Drug Administration (FDA) plans to pursue a ban on menthol cigarettes, The Wall Street Journal reported.
  • As early as this week, the FDA is expected to announce a ban on the sale of most flavored e-cigarettes in convenience stores and gas stations.
  • As a result, tobacco stocks took a hit across the broad.
  • The potential menthol ban won’t have a near-term effect on the markets, according to analysts.

Tobacco stocks are getting slammed on Monday following a report the Food and Drug Administration is going after menthol cigarettes, which the investment firm Jefferies says represents 34% of the total US cigarette market.

FSA Commissioner Scott Gottlieb plans to pursue a ban on menthol cigarettes, The Wall Street Journal reported on Friday, citing senior agency officials. The final rule banning menthol could take a year or more, and the enforcement could take another year, sources said.

The FDA’s possible ban on menthol cigarettes is the latest in a series of crackdown on the industry. As early as this week, Gottlieb is expected to announce a ban on the sale of fruit- and candy-flavored e-cigarettes from companies like Juul in convenience stores and gas stations in order to stop young people from getting addicted. The planned restrictions will not include vape shops or other specialty retail stores, and menthol and tobacco flavours will be exempt from the restrictions.

As a result, tobacco stocks were under pressure. Here’s the scoreboard as of 9:42 a.m. ET:

While cigarette makers are taking a hit, Wall Street analysts are saying the potential menthol ban won’t have a near-term impact.

“Menthol regulation would have to go through the FDA’s rulemaking process, which could take at least two years to finalise, and the industry would likely have one to two years to implement the change,” said Pamela Kaufman, an analyst at Morgan Stanley.

Kaufman added: “The FDA has been evaluating the role of menthol in cigarettes since the passage of the Tobacco Control Act in 2009, and more recently increased its focus on flavours in e-cigs/menthol cigarettes as part of its Comprehensive Tobacco & Nicotine Regulatory plan announced last year. Despite these efforts, we do not believe that the market has been anticipating a near-term focus on menthol.”

And Jefferies analyst Christopher Mandeville agreed.

“At face value, this could have a material impact on the c-store channel; however, we’d advise investors to be mindful of how regulatory change is often a slow process,” he wrote. “Moreover, any ban doesn’t necessarily equate to an absolute loss of sales/GP$ as users have alternatives for their nicotine fix.”

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