Wells Fargo Sees Menthol Ban as Unlikely; Buy on Dip

Wells Fargo analyst, Bonnie Herzog, says to buy into tobacco following a report on potential FDA ban on menthol cigarettes. Late Friday afternoon (11/9), the WSJ reported that the FDA plans to pursue a ban on menthol combustible cigs this week according to senior agency officials, possibly announcing a move in conjunction with its aggressive actions to address the e-cig youth "epidemic". Herzog continues to believe an outright ban on menthol is very unlikely as the FDA has been very clear that it will adhere to a science-based approach to evaluating/acting on menthol.

Menthol cigs in the U.S. represent ~35% of total industry volume. British American Tobacco's (NYSE: BTI) Reynolds has the greatest share and Wells Fargo estimates ~55% of its volume in the U.S. is menthol. Wells Fargo estimates British American Tobacco (NYSE: BTI) ~21% of Altria Group's (NYSE: MO) volume is menthol representing ~18% of its total profits (MO’s share of the menthol category is just under 30% & Marlboro’s share of menthol ~22%). We estimates ~20 of Imperial’s volume is menthol.

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