News 
Market Data 
Discover
Replies to post #8898 on Cronos Group Inc (CRON)
Altria Group (MO) had experienced a rally the past 12 months from the lows of the COVID-19 sell off during early 2020. Tough times may be ahead however, as regulatory risk looms with old policies becoming new again under the Biden administration. That risk could put focus back on MO's alternative investments, which haven't exactly impressed in recent times.
Low nicotine cigarettes and a menthol ban
A major issue hanging over the head of MO throughout the 2017-2019 period, was the possibility that the US Food and Drug Administration (FDA) would continue to attempt to curb cigarette use through new regulation. One very worrying proposal for Big Tobacco was the possibility that the FDA would introduce a standard for nicotine levels in cigarettes. The idea behind such a standard would be to potentially render cigarettes minimally- or non- addictive by reducing nicotine levels to a point that they "do not spur or sustain addiction for some portion of potential smokers." That idea made its way to a more formal proposal in July 2017, during the era of FDA commissioner Scott Gottlieb (May 2017-April 2019), and its announcement produced a 19% intra-day decline for MO, the worst in 18 years.
Whether or not the FDA's proposal would actually work is debatable, but from an investing viewpoint, that isn't needed to hurt the share price. It is the optics. The risk that it might work, the uncertainty over future revenues.
Gottlieb's run as FDA commissioner ended in April 2019, with some speculation that his tough action on the teen vaping epidemic and Big Tobacco may have been behind his exit. Adding more fuel to that conspiracy theory, by the end of 2019 the proposal was gone from the list of regulatory priorities.
Whatever you think of the timing of those events and the conspiracy theory, the apparent end of the proposal was a major boon for MO, and indeed other cigarette manufacturers.
Unfortunately for Big Tobacco investors, the problem isn't gone forever. On April 19, 2021, it was reported that the Biden administration was reportedly considering a reduction of nicotine levels in cigarettes or a ban on menthol cigarettes, or both. Regulation of Menthol cigarettes was also in play during the Gottlieb era where a ban on menthol cigarettes was considered in concert with a ban on flavoured e-cigarettes (with the exception of tobacco, mint and menthol e-cigarette flavours). It is in fact a court ruling from 2013 however, regarding a citizen's petition to ban menthol cigarettes and/or reduce nicotine levels in cigarettes, that is driving potential action. The FDA is required to respond to the potential menthol ban by April 29, although president Biden is supposedly getting involved with the decision.
The most recent headlines concerning a potential menthol ban suggest action is due Thursday, April 29, so by the time this article reaches you, we may have an answer on that. With regards to cutting nicotine in cigarettes, The Washington Post reports that the Biden administration would not announce action on the issue of lowering nicotine in cigarettes this week. That means even if Big Tobacco escapes without a menthol ban this week, concerns over a reduction in nicotine levels in cigarettes will still be in play.
Alternative investments back in focus
Unfortunately the possibility of reduced revenues from combustible cigarettes puts the focus back on MO's other options. However MO's acquisition of a stake in JUUL labs, and Cronos Group (CRON), haven't looked so intelligent so far.
In 2019, impairment charges related to those investments were a major factor in negative net income for 2019 (-$1.3B). JUUL came under heavy fire from the regulator and lawsuits a plenty were initiated in 2019, with MO recording a total of $8.6B in pre-tax impairment charges related to what was initially a $12.8B stake in December 2018 when it was announced.
The "performance" of the CRON investment wasn't a whole lot better with MO reporting pre-tax charges of $0.9B for 2019. Not very impressive for a C$2.4B investment announced in December 2018.
To summarise MO went spending in late 2018 on alternative investments and by the end of 2019, those had blown up in MO's face, resulting in some of the worst earnings in years.
