Investing.com -- Shares of British American Tobacco (NYSE: BTI ) climbed 3.9%, Philip Morris International (NYSE: PM ) increased by 3.8%, and Altria (NYSE: MO ) rose 3.5% as investors digested the impact of new US tariffs on the tobacco industry. Despite initial concerns, the tariffs are expected to have a manageable impact on the sector, with some potential benefits.

The new tariffs introduced by the US include a baseline of 10% on imports from all countries, with additional levies on goods from specific nations, such as China and Indonesia. For tobacco companies, key products like cigarettes and nicotine pouches are predominantly manufactured domestically, which shields them from the brunt of these tariffs. However, vapes and non-tobacco company pouches, mainly produced in Asia, could see price increases.

UBS analysts believe that the new tariffs may not significantly disrupt the tobacco industry. For example, the popular grey-market vape brand Geek Bar PulseX, manufactured in China, could witness a retail price increase of 9-14%, which is still considered affordable when compared to traditional cigarette packs. Moreover, some of the duty could be absorbed by distributors or retailers, mitigating the impact on consumers.

British American Tobacco’s US vapor offering, Vuse, which is manufactured in Indonesia, could experience a 5-6% price increase due to a 32% tariff. However, this is deemed manageable by UBS, and could potentially drive consumers towards grey-market vapes. Nicotine pouches from Asia, representing a small portion of the market, may see price hikes of 5-10%, while products like Imperial’s Zone, manufactured in Canada, might be exempt under the USMCA.

UBS analyst Faham Baig commented on the situation, stating, "the economic uncertainty is likely to continue to benefit the defensiveness/low volatility of the tobacco sector (and investors may look at sectors where the majority of production is domestic/local, which would include tobacco). This could result in the tobacco sector continuing to outperform." This sentiment reflects the broader expectation that the tobacco sector’s resilience and local production focus could shield it from negative impacts and even lead to outperformance in the current economic climate.

The broader implications of the tariffs could pose challenges for the US consumer market, potentially affecting cigarette volumes, particularly for companies like Altria and British American Tobacco that operate in the premium segment. Despite this, the overall defensiveness and low volatility of the tobacco sector are seen as positive, with the possibility of continued outperformance in the market.

It is worth noting that tobacco stocks fell yesterday, as a U.S. Supreme Court decision favored the FDA’s application rejection of some flavored vape products. Investors were concerned of the regulatory challenges the industry faces, causing all the above mentioned stocks to experience a downtick in trading on Wednesday.

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