'Tumultuous Times In Tobacco' Prompt Altria Downgrade

Shares of Altria Group (MO) dropped in morning trading after an analyst downgraded the stock to Market Perform, telling investors that she sees accelerating declines in an already deteriorating U.S. cigarette market. 

ACCELERATING DECLINES, DETERIORATING MARKET: Cowen analyst Vivien Azer downgraded Altria to Market Perform from Outperform and lowered her price target to $53 from $74. In a research note to investors, Azer said that Altria's cigarette volumes will drop at a 7.3% compound annual growth rate, or CAGR, over the next five years, compared to the average decline of 3.1% over the last five years.

"Although the Juul investment was likely the right move, Altria is incentivized to accelerate cigarette industry volume declines" in the already deteriorating U.S. cigarette market, Azer said in a note titled "Tumultuous times in tobacco for Altria." Azer lowered her net sales growth for 2019 to 2023 by 60 bps to 1.9% to reflect accelerating volume declines. "Juul is probably a good deal for Altria that suffers from poor timing, and would be a key factor in our getting more constructive on the name," the analyst added. She expects pricing to continue to be an offset, and would expect pricing to accelerate in tandem with volume declines, but not to the magnitude to sustain the category's historic 2%-3% top-line growth.

She further contended that while Altria's management is targeting accretion from the combination of Juul, Cronos (CRON) and cost savings initiatives within two years, "it is apparent that the base business will have its own challenges." 

OTHER SECTOR DOWNGRADES: Separately, Cowen's Azer downgraded British American Tobacco (BTI) and Imperial Brands (IMBBY) to Market Perform from Outperform. The analyst said she is growing increasingly cautious on the outlook for combustible cigarettes in the U.S. as her model suggests cigarette industry volumes will likely fall at an 8% CAGR between 2018-2025 with price not serving as an adequate offset. 

WHAT'S NOTABLE:  On December 20, Altria announced a $12.8B investment in Juul Labs, which it called "the U.S. leader in e-vapor." Altria's investment, which had been widely expected following recent media reports, represents a 35% economic interest in JUUL, valuing the company at $38B. Juul has drawn criticism over its products' popularity with teens and the U.S. Food and Drug Administration previously announced plans to place restrictions on sales of flavored e-cigarettes. Juul also said it would restrict sales of nearly all its flavored pods to the internet, and stop most social media promotion to combat youth vaping. Altria previously said it would pull its pod-based e-vapor products from the market until approved by FDA.

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