US tobacco volume declines to steepen, reckons Cowen

At the start of the new year, the investment bank's analysts are "increasingly cautious" on tobacco, particularly in the US.

While there was only a 50-100 basis point drag on cigarette volumes last year from vaping, or e-cigarettes, the "meaningfully higher rates of e-cigarette use among younger consumers will have an increasingly negative impact on industry volumes, as the consumer waterfall effect takes hold", with the 2018 industry volume decline of around 4.5% expected to double to around 10% by 2025.

E-cigarette use is forecast to increase to around 13.7%, including dual use, by 2025, lifting retail sales from the $6.6 bn in 2018 to $26.8bn.

The main driver for the doubling in tobacco declines are vapour, or e-cigarettes, but the US Food & Drug Administration is also proposing a menthol ban and could move to a minimum purchasing age of 21, which is estimated to have a 50 basis point headwind to industry volumes. If the FDA vastly reduced nicotine levels in cigarettes this would drive a "meaningful shift" away from combustible smokes, but is expected to be a long time coming.

US-listed Altria, and dual US- and UK-listed British American Tobacco and Imperial Brands were all downgraded by the analysts to 'market perform' from 'outperform'.

After US-listed Altria acquired a 35% stake in vapour rising star for $38bn in December the rewards "will take time", Cowen said, depressing earnings per share for the next two years due to the hefty price tag. A new price target of $53 was set.

British American Tobacco is "arguably the most disadvantaged" by the changing US landscape, as it has experienced meaningful market share losses in the e-cigarette category for its Vuse offering and is the market share leader in menthol. "An offset from more stable volumes internationally should be somewhat helpful", analysts said, slapping on a new 2,650p target.

Of the global tobacco companies covered, the analysts said Imperial "has always boasted the most attractive valuation, but has also been the most challenged in terms of market share development" - thought still remains "a good cost cutting story". However, market share softness in the US and internationally, coupled with increased regulatory risk in the US makes them more cautious. The target price was 2,500p.