Lorillard Inc. (LO): Will the FDA Stub Out Menthol Cigarettes?

Here we go again. The FDA is putting menthol cigarettes in its crosshairs again, not because they’re any more likely to cause illness than regular cigarettes, but because they can serve as a gateway smoke for kids.

The regulatory agency released its “preliminary scientific evaluation” yesterday and admitted there’s little evidence showing menthol cigarettes are any more toxic than non-menthol ones, but that doesn’t mean it doesn’t think they should be more stringently regulated. Of course, it’s “for the children.”

Because the mint-flavored cigarettes mask the harshness of tobacco, teenagers may be more willing to start smoking, get addicted, and find it harder to quit. It was one of the reasons that flavored cigarettes, such as those infused with candy, fruit, or spice flavors, were banned back when the FDA was first given regulatory power over the cancer sticks. According to studies, half of all teens prefer menthol-flavored cigarettes, though the FDA itself says 30% of adults and 40% of teens enjoy smoking menthols.

And it is a growth segment. The federal Substance Abuse and Mental Health Services Administration says menthol cigarettes’ share of the market grew from 33.9% in 2008 to 37.5% in 2011.

Lorillard Inc.Lorillard Inc. (NYSE:LO) is the premiere menthol cigarette maker, with its top-selling Newport brand, and it would have the most to lose from a ban or even tighter regulation. Indeed, Newport accounts for 85% of Lorillard’s total volume and 88% of its cigarette volume, and it not only owns 13% of the entire retail cigarette market but commands 37.6% of the menthol market too.

Other cigarette makers have menthol cigarettes, too, but their share of the market is nowhere near Newport’s. For example, Reynolds American, Inc. (NYSE:RAI) captured a 3% share with its menthol brand of Camel cigarettes and it has been adding menthol flavors to its other brands like Pall Mall. Kool remains its signature menthol cigarette, however.

Similarly, Altria Group Inc (NYSE:MO)‘s Marlboro brand, the best-selling cigarette around, with almost 43% of the entire cigarette market, supplements those sales with menthol-flavored smokes.

Newport, though, has likely been stealing share from British American Tobacco PLC (ADR) (NYSEMKT:BTI) , the maker of the other global menthol brand, Kent, whose shipment volumes fell 7% last quarter.

Probably the only thing that’s kept the FDA from banning menthol cigarettes already is that those studies showing teens like the minty flavor also show that black smokers overwhelmingly like them, too. Some 80% of black smokers enjoy the less harsh taste, according to The Washington Post, and banning them would undoubtedly be characterized as being racially motivated.