Is Altria’s share price going up in smoke?

Recent research has revealed the health hazards that long-term vaping could have on lung health, prompting regulatory changes that have struck another blow to the tobacco and electronic cigarette industry.

Meanwhile, global tobacco producer Philip Morris International [PM] shelved merger talks, reported to be worth as much as $200bn, with fellow tobacco giant Altria [MO].

“While we believed the creation of a new merged company had the potential to create incremental revenue and cost synergies, we could not reach agreement,” a statement from Altria CEO Howard Willard said.

The original agreement between Philip Morris and Altria involved partnering on reduced-risk products. Philip Morris International had developed a heated tobacco product called IQOS and Altria planned to sell the product in the US, starting in Atlanta, according to reports, something that Willard said Altria looked forward to continuing under its “existing arrangement”.

Analyst Bonnie Herzog from Wells Fargo said: “Obviously the timing of the merger wasn’t right given escalating regulatory headlines, but we still see the merits of this combination and wouldn’t be surprised if talks resume at some point in the future when the environment is better.”

“While we believed the creation of a new merged company had the potential to create incremental revenue and cost synergies, we could not reach agreement” - Altria CEO Howard Willard

To make matters worse, Altria has owned a 35% stake in Juul Labs since December 2018, paying $12.8bn for its controlling stake. Juul Labs appears something of a scapegoat for criticism of the vaping market, the Financial Times suggests, as it controls 70% of US e-cigarette sales.

Juul Labs also faced scrutiny over some of its advertising campaigns, which led to it suspending all advertising in the US and Altria replacing its CEO Kevin Burns, with Altria’s KC Crosthwaite, who will be moving into the role of CEO at Juul Labs in an effort to reassure Philip Morris that Altria has a commanding control over the company. Willard said in a statement that Crosthwaite’s appointment was important in “urgently confronting and reversing underage use of vapor products”.

Current performance of Altria

At the close of last week (27 September) Altria’s share price had fallen by 14.68% YTD, as its share price dropped from $47.04 to $40.13, with shares having dropped by 7.1% in September alone.

But Altria isn’t the only company in the market seeing a slump in share price recently, as Imperial Brands [IMB] plunged to close at 12.92% on 26 September.

Altria share price vitals, Yahoo Finance, 30 September 2019

Conversely, Philip Morris has been outperforming industry peers, with its share price currently up by 12.54% since 31 December 2018. Surprisingly, Philip Morris saw a 0.3% decrease in its quarterly revenue growth in July compared to the year-ago quarter, although this left the firm with $7.7bn in revenue for the period, slightly higher than the $7.37bn forecast by analysts.

Comparatively, Altria is boasting a healthy profit margin of 32.09% and an operating margin (TTM) of 51.68%. It has a 12.62% return of assets (TTM) and 41.62% return on equity (TTM). With both its quarterly revenue and quarterly earnings growth sitting at 6.40% year-on-year, it could be argued Altria remains an attractive prospect for investors, despite recent regulatory changes and bad press.

While Herzog wrote in a note to clients that concerns over Juul “will likely weigh on [Altria’s] multiples,” she noted that Wells Fargo continues to think that these are “overblown” and therefore it continues to recommend the stock, MarketWatch reported.

Is it time to short Altria?

With 52-week highs of $66.04 and lows of $39.30, this 40.49% suggests some significant volatility. In light of the ongoing volatility, investors are looking for a short-term solution, which is backed by Altria’s reassuring stats.

As of 13 September, Altria shorted shares numbered 14.72 million, with a short ratio of 1.17.