Tobacco producers Imperial Brands PLC (LSE:IMB) and British American Tobacco (BAT) might both move higher in 2023 but will have to navigate through US legislation first, analysts at Jefferies said.
Over the last twelve months the two companies’ share prices have experienced different trajectories, BAT is down 1.5% whereas Imperial Brands has grown by more than 25%.
With the FDA expected to lay out plans for regulations for menthol and potentially nicotine by the end of June, regulation could impact both of the stock’s values.
With these expected changes comes a requirement for both businesses to adapt and is why ‘reduced-risk products’ such as vapes, tobacco heating and oral tobacco are the new focal point of the industry.
However, to bring such products to market in the states requires approval from the FDA, the US Food and Drug Administration.
“For BAT, its latest FDA status update indicates the decision may now be pushed into 2024,” said Jefferies, adding “if Imperial Brand’s approval for its vape product is denied it would not have any reduced-risk products.”
Imperial Brands
The US bank sees Imperial Brands as a winner should the US head into a recession as investors could seek “earnings momentum, limited leverage, buybacks and yield,” in such an environment.
Still, the Bristol-based company is predicted by Jefferies to lose market share in the US this year and with “any sizeable merger and acquisitions off the cards,” the bank’s analysts rate the stock a ‘hold’.
Britsh American Tobacco
A more positive view is held about BAT with the company’s “multiple risks arguably skewed to the upside.”
The London-based business is forecasting growth below consensus, with its outlook accounting for an exit from Russia -something peers have not.
Yet, the company’s earnings are predicted to be more than five times better than rivals, Jefferies added.
Should regulation of combustible products, cigarettes, and tobacco, occur BAT is believed to be more resilient with brands such as Velo, Glo and Vuse ready to capitalise.
BAT could also benefit from a potential US ban on illegal vapes, enhancing its market share in the area.
Jefferies, therefore, rates the stock a ‘buy’ despite reducing its price target by 29% to £41.