Cigars Succeed Despite Regulations, Recession
Jillian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A fellow cigar-smoker taught me one of my first lessons in finance: Never get emotionally attached to an investment. Good advice, but with premium cigars, you can follow your heart. Though U.S. regulators have some nasty restrictions planned, premium cigar manufacturers will survive and thrive, as they did throughout the recession.
Congress delegated regulatory power over tobacco to the Food and Drug Administration in 2009, and the agency is now seeking to crack down on cigars (Bureaucratic killjoys). There’s an effort underway in Congress to exempt high-end cigars from FDA reach, but it has little chance of approval among the paternalists in the Senate.
A quick sampling of the rules: Cigar smokers won’t be able to see, smell or touch their cigar until it’s purchased (So much for testing whether the humidor worked properly). Customers will have to pick their cigar from a drab black-and-white catalogue. Humidors and shop windows will have to be blacked out.
This bodes ill for gas-station cigars (if you can deign to call such sorry fare “cigars”).
Does anyone really sit at home and crave a Black and Mild by Phillip Morris USA (NYSE: PM), or a Swisher Sweet? They’re an impulse buy, and obscuring them from public view will hurt their pseudo-cigar sales.
Likewise, local tobacconists will lose new smokers, who need that hands-on, sensory, in-humidor experience as they develop their cigar taste. Lounges already operate on small margins, and they may not be able to afford losing that clientele. International Premium Cigars and Pipe Retailers, which represents cigar retailers, says the FDA will endanger 85,000 American small-business jobs.
But the real cigar aficionados, who constitute the most important clientele, will simply turn online if their local cigar shops close. Just as they haven’t been deterred by rising cigar taxes, stalwart cigar smokers won’t be stopped by federally mandated hassling.
Imperial Tobacco (NASDAQOTH: ITYBY.PK) is the perfect case study. It offers some of the most popular cigar brands in the U.S., from the Romeo y Julieta to the Montecristo—all of which have sold well despite America’s recession and hostile regulatory climate.
Likewise, British American Tobacco (NYSEMKT: BTI), maker of Dunhill cigars and one of Imperial’s main competitors, has posted profits during the economic hard times.
These companies have a sunny outlook, too. With its acquisition of Altadis a few years back, Imperial gained a substantial share in Cuba’s state-owned Habanos SA. If that sounds familiar, it’s because Habanos makes the legendary Cohibas. Whenever the U.S. gets around to lifting its Cuba embargo, Imperial will have a much-demanded product on its hands.
Cigars are also a solid bet because they’re a global commodity. Both Imperial and British American Tobacco are taking advantage of the growing demand for cigars and other tobacco products in developing economies from Eastern Europe to Africa to China.
Despite the FDA’s ill will, premium cigar manufacturers aren’t going anywhere. So, quite literally, feel free to put your money where your mouth is.
JillianKayM has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.