Book Gains in Lorillard Inc. (LO) Now

It has finally happened. The FDA has finally started to seriously raise the issue of a full-on ban on menthol tobacco products. However, before it takes action, the administration has decided to purse more research and public comment on the issue. On July 23, the FDA issued what it called ‘”an advanced notice of proposed rule making,” which typically indicates that the administration is considering regulation. In this case, it’s considering establishing or amending tobacco-product standards.

The latest FDA evaluation on menthol-tobacco products appeared to show that there are no significant risks to smokers from smoking menthol cigarettes compared to normal tobacco products. However, the FDA noted that due to the minty flavor and smoother taste of the menthol products, consumers are more likely to start smoking and less likely to give up than with regular cigarettes and tobacco products. The FDA also noted that due to the minty flavor, younger smokers were more likely to start smoking menthol than if they were only offered regular products.

Major problem

This is a major problem for tobacco company Lorillard Inc. (NYSE:LO), which depends on menthol cigarette sales for 90% of its revenue. Indeed, Lorillard Inc. (NYSE:LO)’s Newport menthol brand accounts for 35% of the market.

Although these findings are damming, especially to Lorillard Inc. (NYSE:LO), there is still a significant amount of uncertainty ahead. The FDA is not proposing any changes to the law until further study is completed, especially public comment, which can be submitted for 60 days. On the other hand, four months ago in a different study, the FDA found that menthol smokers are at a lower risk of dying from lung cancer compared to non-menthol smokers at the age of 50 or over – another conflicting and confusing opinion.

Will this just affect Lorillard?

Any restriction will significantly affect Lorillard Inc. (NYSE:LO). As I have already mentioned, the company gets 90% of its revenue from the sales of menthol and comprises 35% market. Furthermore, it remains to been seen if this negativity from the FDA concerning menthol cigarettes will dampen sales of its key Newport menthol brand, which has seen both its sales volume and market share rise rapidly over the past five years despite the general decline in cigarette sales overall.

Reynolds American, Inc. (NYSE:RAI) also holds 3% of the US menthol market through its Camel menthol, Camel crush and Pall Mall brands. Some 30% of Reynolds American, Inc. (NYSE:RAI)’s sales are in menthol products, so it can be assumed that Reynolds will lose between $1 billion and $2 billion in sales per year. In addition, Reynolds’ menthol products are its fastest-growing range.