NEW YORK -- In recent weeks, Lorillard Tobacco Co. shares have sold off 10%. With the U.S. Food & Drug Administration (FDA) expected to make an announcement on a speculated menthol ban, investors appear to be anxious about how the Newport-manufacturer would perform in a menthol-free market. While analysts from banking and financial services group UBS do not believe the FDA will actually go through with the ban, they do see how Lorillard could survive a menthol-free marketplace, thanks to both the strength of the Newport brand and the discrepancy between menthol smokers who would intend to quit and those who would follow through.
While studies conducted by both the Tobacco Products Advisory Committee (TPSAC) and UBS found that over a third of menthol smokers surveyed would quit smoking if menthol were banned, other studies suggest very few people who intend to quit actually do so. A 2008 Center for Disease Control & Prevention (CDC) study found that 70% of adult smokers in the United States stated they wanted to quit smoking completely; however, only 45% of those surveyed made an attempt to quit and fewer than 10% were actually successful.
Analysts at New York City-based UBS see no reason these figures would change drastically for menthol smokers.
While fewer people quitting would certainly help Lorillard and other menthol-manufacturers, it’s the Newport name that UBS analysts see as Lorillard’s biggest asset, suggesting the general investing public puts too much focus on menthol as an ingredient and not enough on Newport as a brand.
Despite Lorillard’s status as the least-promoted brand in the industry, Newport boasts some very favorable statistics with both African Americans and preferable age profiles.
While CDC data suggests that 83% of African Americans smoke menthol cigarettes, UBS’ analysis shows that Newports are the only major menthol brand skewing so strongly--50% of Newport consumers are African American, as opposed to Kool’s 28%, Salem’s 24% and Marlboro Menthol’s 5%; 59% of Newport consumers are in the coveted 21-34 age range--Marlboro Menthols skew 40%, Kool skews 10% and Salem skews just 8% in that same group. If consumers were only drawn to menthol, and not the Newport name, one would expect all menthol brands to enjoy such positive demographics.
With menthols being such an important part of Lorillard’s portfolio, sales would clearly take a hit if the FDA goes with a menthol ban; however, should that happen, UBS’ analysts agree that the fallout would be “far less onerous” than investors are currently fearing.
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