Many of you reading this have switched away from smoking traditional combustible cigarettes thanks to vaping, and cigarette manufacturers are feeling the pinch.
Citigroup analyst Adam Spielman recently downgraded shares of Altria, the parent company of Philip Morris International (PMI), from “buy” to “neutral” following a weak earnings report.
The result? A 16 per cent drop in share prices for the Marlboro manufacturer, which Altria called their “worst day in a decade”.
CNBC Mad Money host Jim Cramer stated that “we saw the market’s sudden recognition that the cigarette industry seems to be in serious trouble, disrupted by the rise of vaping”.
Over the course of three short days, the tobacco stocks were bent, they were spindled and they were mutilated by the realization that electronic cigarettes have become a serious threat to the old-school cigarette makers.
The cigarette industry has been falling year-on-year in sales volume for some time now, but in a very predictable manner. Generally the volume sales of cigarettes fall between 3 to 4 per cent each year, which is offset by manufacturers with a price hike.
In a report released on February 6th of this year, PMI noted a sales volume decrease of 7.6 per cent in the final quarter of 2017, leading to a decrease in revenue of 4.1 per cent. Other leading companies also saw dramatic drops in total volumes sold.
|Company||Volume Drop||Price Increase||Revenue Drop|
|Philip Morris International||– 7.6%||+ 4.0%||– 4.1%|
|British American Tobacco||– 3.7%||+ 6.2%||+ 4.5%|
|Imperial Brands||– 4.6%||+ 2.7%||– 2.0%|
Remember that 3 to 4 per cent figure? That’s annual. PMI’s 7.6 per cent drop was in a single quarter, and it led directly to Citigroup’s stock downgrade and their worst day ever.
Wells Fargo Securities estimated in 2013 that sales of electronic cigarettes would surpass traditional cigarettes in 2022, but this recent news could accelerate that.
In the same period that PMI lost 7.6 per cent of their sales volume, revenue from the sales of traditional manufacturer-made electronic cigarettes rose an astonishing 97 per cent. This was led by JUUL, who own a 49.6 per cent market share in the United States, but does not include sales from the Chinese manufacturers that are popular in vape shops (Smok, Innokin, Aspire, Wismec, etc.).
Talking regionally, Australia had the biggest drop for PMI at 18.3 per cent. Eastern Europe was down more than ten per cent, and the European Union was down 6.7 per cent. The only gain was made in South and Southeast Asia, up 6.1 per cent. When one-third of worldwide cigarette sales are made in China, that’s not difficult to understand.
CNBC’s Jim Cramer doesn’t think the carnage is over, either.
“Last week investors realised, practically overnight, that the tobacco industry is facing an existential threat from its vaporiser competitors,” he said.
“And while the group got obliterated last week, I think it could even have more downside.”