Japan's Cigarette Break

(Bloomberg Gadfly) -- Could America's nicotine loss be Japan's gain?

Japan Tobacco Inc., the world No. 4, reported a fourth straight quarter of declining cigarette volumes Wednesday as shipments fell pretty much everywhere in the world except Iran and Taiwan.

Yet, the company raised its full-year operating profit forecast to 565 billion yen ($5.1 billion) for 2017, from the previous forecast of 560 billion yen, on better cost management and the promise of growth in emerging markets.

Wading deeper into places like Southeast Asia, Taiwan and Turkey will be crucial for Japan Tobaccoshould at least help the company catch up

Japan Tobacco has long been the laggard among the world's big players. Relying for too long on its home market, it was less acquisitive than the likes of Altria Corp., Philip Morris International Inc. and British American Tobacco Plc. It failed to anticipate shifts to smoking alternatives and let Philip Morris scoop up almost 10 percent of Japan's market share with its iQOS HeatSticks, which employ technology that heats tobacco rather than burning it. 

Now, American health officials might be unintentionally giving Japan Tobacco a break.

The U.S. Food and Drug Administration announced last Friday plans to limit the nicotine that keeps people addicted to cigarettes. That shook an investor base that (as my colleague Tara Lachapelle points out) has ignored smoking rates in perpetual decline and the rise of cigarette taxes and consumer awareness of health risks. Case in point: In the last 10 years, Altria stock returned more than 400 percent, nearly double Google.

While global tobacco stocks tumbled on the FDA news, Japan Tobacco was an exception. 

Its stock actually rose almost 2 percent in Tokyo that day, probably because the company only has around 1 percent of the North American cigarette market, according to Euromonitor International. 

Japan Tobacco still has work to do: Pursuing new smoking alternatives, ratcheting up M&A, and potentially getting rid of distracting business units like food and pharmaceuticals.

For now, though, it's likely to benefit from the weakness of peers as investors try to work out the impact of nicotine curbs on U.S.-dependent brands like Altria and BAT, which recently picked up Reynolds.

Talk about a nice cigarette break.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

To contact the author of this story: Shelly Banjo in Hong Kong at sbanjo@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.