Friday, January 30, 2009

Lorillard (NYSE:LO): Rep. Waxman bill likely to leave open the possibility of a ban on menthol - Citigroup

Citigroup is out with a cautious call on Lorillard (NYSE:LO) noting Rep. Waxman has said he will, in a few weeks, reintroduce a Bill to ensure the domestic tobacco industry is regulated by the Food and Drug Administration. Citi expects this Bill to be similar to the Bill he sponsored in the House last year. Given the Democratic control of Congress and White House, they expect the Bill to pass.

Most significant for LO The Bill is likely to leave open the possibility of a ban on menthol. Bearing in mind Lorillard (LO) makes more than 97% of its EBIT from menthol-flavored Newport, this is potentially a big issue and is certainly likely to create volatility. However, they don’t believe that it is practical to ban menthol, which currently makes up about 29% of the US cigarette market.

Other likely measures — The Bill is likely to give the FDA much leeway on what to impose. It is likely to make it slower and more expensive to launch new brands, helping cement MO’s dominance , in firm's view. It’s also likely to have many proposals that are already in place in Europe that, in firm's view, have little impact on shareholders, eg banning the term “Lights”.

Unhelpful for sentiment — Clearly this development is unhelpful for sentiment, and supports those who believe that federal and state governments are starting to attack the tobacco industry viciously. Furthermore the timing is an (unwelcome) surprise because they expected the new Congress/ administration to have higher priorities at the moment.

Notablecalls: This is a pretty sharp call, in my opinion and will generate selling interest in LO in the n-t. The menthol ban issue has been overlooked in my opinion and Citi's call will bring it back into attention.

I have to note they do keep a Buy rating on the name here but that's something that can change.

Anyway, I see LO trading lower today on this. Have no idea by how much, though.

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