On the face of it, it would seem Altria’s (NYSE: MO) recent plans have not exactly been panning out. Today the company announced that it has dropped merger talks with Philip Morris International (PMI) (NYSE: PM). The deal would have reunited the two firms after over a decade since the 2008 spinoff, but despite the potential for revenue and cost synergies, an agreement could not be reached.
Altria also holds a 35% stake in JUUL and JUUL is not exactly having a great time now. The e-cigarette leader is facing FDA investigations and bans, which are expected to significantly hurt its sales and expansion plans. Recently Walmart said it would stop selling e-cigarettes while the state of Massachusetts declared a four-month ban on the sales of vaping products.
Altria’s plans might not be panning out but here’s why the company will be fine.
Countries like China and India have also rolled out prohibitions, putting JUUL’s overseas growth plans on the back burner. JUUL said it might have to cut jobs as part of restructuring efforts and the company today announced a change in leadership. JUUL’s CEO Kevin Burns is stepping down and he will be replaced by K.C. Crosthwaite, who comes to JUUL from Altria.
All these matters have raised concerns about Altria’s stake in JUUL. Altria’s $12.8 billion investment in JUUL valued the latter at $38 billion at the time and analysts believe recent events might have pulled this number down significantly. The future of Altria’s stake in JUUL is heavily hinged on the outcome of the FDA’s investigations.
Altria’s stock took hits both when the deal with PMI was announced and since the crackdown on JUUL began. The stock has dropped over 12% in the past one month alone.
However, despite these setbacks, Altria is likely to prevail. The company plans to focus on the launch of IQOS, a heated tobacco product, in the US in partnership with PMI. As per PMI’s estimates, around 8 million adult smokers worldwide have switched to PMI’s heated tobacco product. Although global data has shown IQOS lacked appeal for youth and non-smokers, this trend might reverse going forward.
Secondly, Altria’s fundamental numbers remain strong. In 2018, the company reported revenues of $25.3 billion. In its most recent quarter, revenues grew 5% year-over-year to $6.6 billion while adjusted EPS rose 9% to $1.10. Altria also posted revenue increases in its smokeable and smokeless product segments.
Today, Altria updated its adjusted EPS guidance for full-year 2019 to a range of $4.19 to $4.27 from a range of $4.15 to $4.27, reflecting a growth rate of 5-7% from 2018.
Thirdly, Altria holds a 45% stake in Cronos Group (NASDAQ: CRON) and its approx. $1.8 billion investment is likely to pay off as the medical cannabis market gains prominence. Cronos reported a 202% increase in revenue to CAD10.2 billion in its most recent quarter and witnessed continued growth in cannabis oil sales.
Cronos’ acquisition of Redwood will help increase its footprint in the fast-growing cannabidiol market, particularly in the US. Altria stands to benefit from this success and if it were to acquire Cronos, it would open up new avenues for growth.
Although Altria’s stake in JUUL is likely to be impacted by the FDA’s impending decision, its future is not entirely dependent on it. Through its strong sales and diversification into new products, Altria is likely to be just fine.