Categories Analysis, Consumer

Altria Group stock plunges to 4-year low

Altria Group (MO) stock plunged to a new four-year low of $44.57 on Tuesday after a warning in the marketing of e-cigarettes as teens usage increases. Investors remained concerned on the future of the tobacco company as the company is entangled in the risk and regulations radar. Traders have believed the stock to be a good investment and the current levels called for a buy.

The business algorithm of the wine, smokable products, and smokeless products manufacturer remained under risk from the changing demographic trends and harsh Food and Drug Administration (FDA) regulations. The FDA commissioner Scott Gottlieb threatened to ban e-cigarettes if youth usage continues to rise and the companies continued marketing aggressively throughout 2019.

The agency has been looking into ways to help wean teenagers off nicotine due to the increase in the number of middle and high school students using e-cigarettes. A federal data showed that e-cigarettes remained popular among the teens during the last year and they were unable to stop using e-cigarettes. The FDA wanted to find ways to stop teens from using e-cigarettes as nicotine addiction treatments are intended for adults, not minors.

The market remained concerned as the commissioner’s comment has been targeted to the whole industry. This has created a concern for Altria, which invested a massive $12.8 billion in the e-cigarette maker Juul in December 2018. The investment represents a 35% economic interest in Juul, valuing the company at $38 billion.

Altria announces minority stake in JUUL and cost reduction plans

This news from the FDA could hinder Juul’s growth and make Altria’s investment much less valuable. In case, the FDA steps in with new strict regulations targeting e-cigarettes, then also concerns for Altria could mount high. If an event occurs either from strict regulations or a ban in the worst scenario could cause Altria to write down a multi-billion dollar portion of Juul investment.

Majority of the investors are concerned about Altria’s capability in maintaining the current dividend and remain a going concern, in the extreme case. If there is a ban on e-cigarettes then it could lower the future growth potential and intrinsic value of shares instead of a dividend cut. This could cause the share price to plunge severely and making this one of the worst scenarios.

Traders remained concerned about the uncertainty surrounding Altria’s return on investment on Juul. In addition, Altria and the industry have been facing serious threats including the possibility of regulation to lower nicotine, ban menthol cigarettes and regulation or ban on e-cigarettes.

Related: Altria Group Q3 2018 Earnings Transcript

Following this, a Morgan Stanley analyst cautioned that Altria could be negatively impacted by the decline in the cigarette volume during this year. The analyst downgraded the company to “underweight” from “equal-weight”. This comes after the downgrade made by Citigroup and Cowen since December 20, 2018.

Altria is in the midst of reporting its fourth-quarter earnings on January 31. Analysts expect the company to report earnings of $0.95 per share on revenue of $4.84 billion for the fourth quarter. Majority of the analysts recommended a “strong buy” or “buy” rating while expecting the stock to reach $57.95 in the next 52 weeks.

Shares of Altria ended Tuesday’s regular session down 6.91% at $44.97 on the NYSE. The stock has fallen over 36% in the past year and over 26% in the past three months.

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