Altria Group (MO) is rising Thursday, as a long-time bull reiterated her enthusiasm for the former laggard after meetings with management that left her more confident in the company’s stakes in e-cigarettes and cannabis.
The Back Story. Last year was all strike and no lucky for traditional cigarette makers, and vaping was the major culprit: E-cigarettes may not be terribly helpful when it comes to quitting tobacco, but they are taking greater and greater market share. Juul Labs, which Altria invested in late last year, has prevailed in the U.S. while a rival product from Philip Morris International (PM) languishes without government approval. Meanwhile, 2018 was rife with reports of falling cigarette volumes and concerns about flavoring crackdowns across the board.
However, in 2019, Altria has been an outperformer, rising 15% year to date. The company delivered better-than-expected earnings, investors are optimistic about its cannabis investment, and Barron’s argues that the shares are an overlooked gem with a generous payout.
What’s New. Wells Fargo ’s Bonnie Herzog reiterated an Outperform rating and $65 price target on the shares Thursday, writing that after meeting with Altria’s top brass, she came away more encouraged by the company’s “very upbeat tone” and “high degree of confidence” in meeting their 7% to 9% long-term earnings per share growth target.
Herzog has long been a fan of tobacco stocks, so her optimism isn’t too surprising. However, she writes that the company’s core cigarette business isn’t as bad as feared, approval for Philip Morris’s iQOS device could “around the corner (hopefully),” and the threat of regulation, while still an overhang, will fade in importance for the stock. (Plenty of investors were hoping that new Food & Drug Administration head would mean fewer worries for tobacco stocks.)
Looking Ahead. With her belief that Altria can reach its long-term profit goals, Herzog also commended the company for its “willingness to disrupt [its] own business;” it’s “taking decisive actions and pivoting fast,” as evidenced by its Juul stake. In fact, “Juul could ultimately be the Marlboro of e-vapor,” she writes, while its international runway looks robust thanks to a strong pipeline of new products. In addition, she writes that Altria’s investment in cannabis firm Cronos (CRON) is another underappreciated growth driver