Tobacco sector investors eye the crucial U.S. election wildcard

Investors in the tobacco sector have plenty to watch, with a closely contested U.S. election a potential factor in the direction of legislation.

Analysts have gone on record that a Republican win for the White House and/or Congress would be generally positive for the tobacco sector, although perhaps not to the degree that some investors anticipate.

Bloomberg Intelligence noted that increased oversight of illegal products and a reduced appetite to pass the ban on menthol cigarettes could be a boost if the GOP gains more control. On the flip side, under a Kamala Harris administration or Democrat-controlled Congress, there could be increased risk to tobacco credits as the menthol ban would have a higher chance of passing.

A key part of the tobacco sector post-election scenario is the degree to which there is a crackdown on noncombustible products, including vapes and nicotine pouches, that have circumvented the FDA approval process. The movement from cigarettes to illicit disposable e-vapor products contributed to an estimated 2% to 3% cigarette industry decline over the past 12 months. While there is some disagreement about which presidential candidate or party would act more forcefully overall on the enforcement issue, a consensus of analysts thinks Donald Trump would be quicker to place stringent rules on illegal noncombustible products, including those exported from China.

As far as a potential menthol ban, a Trump Administration is expected to delay any further action significantly, while a Harris Administration is seen having a higher possibility of passing the ban, but still at only a 60% probability, per Bloomberg.

On Wall Street, Bank of America boosted its price objective on Philip Morris International (NYSE:PM) to $139 from $125. Despite clear volume challenges due to illicit vapor, cigarette and oral nicotine volume, the firm sees some green shoots for improving sentiment due to strong pricing power, regulatory progress, solid scanner data suggesting that on! pouches are benefitting from ZYN shortages, increased shareholder returns following a partial divestiture of its ABI stake with $2.4 billion in proceeds added to its buyback program and the reinforcement of attractiveness of U.S. cigarettes category given Japan Tobacco’s (OTCPK:JAPAY) recent announcement to purchase Vector Group (NYSE:VGR).