However, the underlying fundamentals of the U.S. tobacco business aren’t nearly as good as their stock prices would indicate. Altria Group Inc (NYSE:MO) laid off 15% of its workforce and Reynolds American, Inc. (NYSE:RAI) 10% in response to falling cigarette volume. Furthermore, in President Obama’s budget proposal, the federal cigarette tax would be raised 93% to $1.94 per pack, making it even more burdensome on American consumers to purchase a pack of cigarettes.
Few domestic tobacco producers are prospering, with the exception of Lorillard Inc. (NYSE:LO), which has seen a decade’s worth of market share gains thanks in large part to the success of its premium Newport brands and its discount brands such as Maverick. Unfortunately for much of Big Tobacco, what gains these companies do see in the volume of discount cigarette sales, they are losing in their margins, which are often much lower than premium brands, making it much tougher for tobacco companies to simply maintain their profits as the number of smokers slowly dwindles.
So much for safety
I think it’s fairly safe to say that the tobacco industry is no longer the safe bet it once was. I’ve been harping for two years now about the dangers of the domestic tobacco industry, with U.S. laws becoming more smoking-repressive. I’ve certainly been wrong, with Altria Group Inc (NYSE:MO) and Reynolds American, Inc. (NYSE:RAI) advancing higher in spite of weak volume growth. However, the long-term trend bodes poorly for each company, with U.S. lawmakers progressively angling toward more restrictive smoking measures.
The real about-face could come from the international market, but we’re probably still a few years away, if not longer, from seeing that happen. I feel the chances of seeing India or China adopt stringent anti-smoking laws is pretty slim. We could, though, see more developed countries follow the example of the U.S., and Russia and take a hard-line approach to smoking in public places. I don’t see how this will have any positive impact whatsoever on the sector as a whole and would, yet again — outside of Philip Morris International Inc. (NYSE:PM), which has the most globally diverse product portfolio of any publicly traded tobacco company — suggest keeping your distance.
The article Will Russia’s Monkey Wrench Cripple the Tobacco Industry? originally appeared on Fool.com is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Philip Morris International.
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