By CCN: The once invulnerable tobacco powerhouse, Altria, saw its stock get clobbered on Thursday after it reported disastrous earnings.
Cigarette sales have plummeted and taken Altria stock down with it, as consumers move towards e-cigarettes, vaping, and cannabis. The company has made strategic investments in the alternative products in an effort to fire up revenues.
Altria Suffers Troubling Decline in Cigarette Sales
Altria stock suffered after it revealed that cigarette volumes had dropped by 14 percent. | Source: Shutterstock
In the first quarter, Altria posted a diluted earnings per share number of $0.90, after removing one-time items. This was a 5.3 percent year-over-year decrease from the first quarter of 2018.
Altria stock is reacting to a skyrocketing interest expense from issuing $16 billion in new debt, weaker revenues from an enormous drop in cigarette sales, a higher tax rate, and its investment in AB InBev.
Consumers have apparently had enough of the hazardous smokeable products that Altria is famous for. Revenues in that segment collapsed by 7 percent to $3.73 billion, as the result of a devastating 14.3 percent decline in cigarette shipment volume.
Smokeless products saw a 3.2 percent revenue bump to $509 million, thanks to pricing power that offset a 2.2 percent shipment volume decline.
Altria’s wine division had an eye-opening 6.6 percent revenue increase to $146 million.
MO Shareholders Aren’t Bullish on Vaping & Cannabis
With MO stock down 7 percent on the day, are investors skeptical about Altria’s move into vaping and cannabis?
Definitely. Investors foolishly appear to be focused more on the past than the future. CEO Howard Willard tried to make this clear in the earnings announcement, saying:
“After taking steps to position Altria for long-term success at the end of 2018, we entered 2019 with an evolved business platform that includes our strong core tobacco businesses and new strategic investments with tremendous potential for growth,” said Howard Willard, Altria’s Chairman and Chief Executive Officer. “We believe we’ve made significant progress in the first quarter on key initiatives to realize the potential of our evolved business platform.”
The tobacco industry is changing – and for the better. To learn about our approach in this exciting and challenging new environment, click here: https://t.co/Ol8Xs44iQK pic.twitter.com/2EHJzFBFbI
— Altria (@AltriaNews) April 16, 2019
He’s absolutely right. Not only that, CFO Martin King told Barron’s last year that Altria is:
“…absolutely planning for a future without traditional cigarettes…and has been very vocal about its vision to move the entire company, and the world’s smokers, to a smoke-free future with a range of reduced-risk products.”
Altria’s stock is showing wear-and-tear right now, but it completed a $1.8 billion investment in Cronos, the Canadian cannabis firm. Cronos is well-positioned to take advantage of the recreational and medical cannabis markets. Altria’s investment gives it a 45 percent ownership and voting stake.
With recreational cannabis earnings broader acceptance in the US, and Canada legalizing cannabis last year, Altria stock should see significant benefit from its Cronos investment over time.
Juul Should Launch Altria Toward Future Profitability
Altria stock should also benefit from its 35 percent stake in Juul, an e-cigarette manufacturer. Altria’s $12.8 billion investment in December valued the company at $38 billion. Juul’s product is already being sold overseas, and is awaiting approval from the Food and Drug Administration.
With $2 billion in revenue in 2018, Juul stands to become the juggernaut of e-cigarettes, making it a perfect fit for Altria.
Between Altria’s current business, and its e-cigarette and cannabis investments, what does MO stock hold for the future? Is now a good time to enter?
Altria guided investors towards 2019 net income of $7.88 billion. With a market cap of $97 billion, MO stock thus trades at a P/E ratio of 12.5. With analysts projecting a 5-year annualized net income growth rate of only 7 percent, MO stock has a PEG ratio of 1.8 – almost 80% higher than what might be considered value.
However, investors willing to hold for the long term should consider that this assumes no contribution from the strategic investments. With the size of the potential markets in e-cigarettes and cannabis, Altria could double earnings within five years, presenting MO stock now as a deep value play.