Altria Group Inc (MO)

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What's Next for Altria (MO) Stock After Kroger (KR), Walmart (WMT), and Other Retailers Abandon E-Cigarette Sales?
By: Zacks Equity Research | October 8, 2019

Supermarket giant Kroger (KR) became the latest retailer to discontinue the sale of electronic cigarettes amid regulatory scrutiny. Kroger joins rival supermarket giant Walmart (WMT) and retail drug store chain Rite Aid (RAD) in the suspension of electronic cigarette sales.

The vaping industry has come under heavy regulatory scrutiny recently after The Centers for Disease Control and Prevention has identified at least 19 vaping-related reported deaths and 1,080 probable cases across 48 states and the U.S. Virgin Islands. The news of Kroger’s decision comes on the heels of published research by New York University that further links vaping to harmful bodily effects.

NYU Study

Researchers at New York University conducted a study looking into the effects of vaping on mice and concluded that electronic cigarette vapor containing nicotine causes lung cancer and potentially bladder cancer in mice. The findings from the study has the researchers concluding that vaping is likely “very harmful” to humans as well. Out of 40 mice exposed to e-cigarette vapor with nicotine over 54 weeks, 22.5% developed lung cancer and 57.5% developed precancerous lesions on the bladder.

None of the 20 mice exposed to e-cigarette smoke without nicotine developed cancer over the four years they studied the mice. The NYU study isn’t the first to possibly link e-cigarette use with cancer. A February study by the University of Southern California found that e-cigarette users developed some of the same molecular changes in oral tissue that cause cancer in cigarette smokers.

What Does This Mean for Altria?

Back in late December, tobacco company Altria (MO) , bought 35% of popular e-cigarette manufacturer, Juul, for $12.8 billion. The purchase was "by far the biggest investment ever in a U.S. venture-backed company" According to Wells Fargo (WFC) , and the deal valued Juul Labs at $38 billion.

The decision to invest and ride the coattails of one of the most dominant vaping companies is now going up in flames. The FDA has called teen use of e-cigarettes an “epidemic” which has prompted the Trump administration to call for the federal ban of flavored e-cigarettes. Flavored pods represent 80% of Juul's revenue.

Large investors are now looking to dump their positions in Juul whose lost a third of its private market value and announced that it was firing 3,900 employees as it restructures its business. The investment has weighed on Altria's balance sheet as merger talks between Altria and international tobacco giant Phillip Morris (PM) fell through as the two companies couldn’t come to an agreement and fingers point towards Altria’s investment in Juul as a main reason talks weren’t successful.

In late September, Juul CEO, Kevin Burns, resigned from his position and former Altria executive, K.C. Crosthwaite, stepped in. Crosthwaite was the former chief growth officer of Altria.

Now that Altria has one of its former executives at the helm, the company can try to salvage the large investment it made in Juul Labs. While it remains a separate business from Altria, Juul labs has aligned itself with the tobacco giant. Altria has decades of experience in dealing with regulators and marketing themselves appropriately which can help it restructure the battered Juul Labs.

Earnings Outlook

Our current quarter consensus estimates have Altria’s top line remaining flat at $5.29 billion while earnings come in at $1.14 per share for a 5.56% jump. Looking ahead to the company’s full fiscal year, estimates forecast net revenue to pop 0.41% to $19.71 billion and earnings to gain 5.01% to $4.19 per share. Altria shares are down 14.4% in 2019 thus far and the stock sports a Zacks Rank #3 (Hold).

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