Altria shares have tumbled 27% over the past year thanks to declining cigarette sales.
The tobacco company Altria has been in the news a lot lately. First, the company was criticized by investors for its decision to reunite with Philip Morris. Then the FDA doubled down on the e-cigarette maker Juul for faulty advertising. Altria owns a 35% stake in Juul.
And this morning, Piper Jaffray analyst Michael Lavery wrote to investors that his “confidence in Altria’s outlook” is waning in regarding the potential merger with Philip Morris. Lavery downgraded the stock and lowered its price target from $64 to $49.
At the time of this writing, shares of Altria remain largely unchanged following the downgrade. But the company will have three serious headwinds to deal with in the coming years.
1. Increased scrutiny of vaping
Initially, Altria’s acquisition of Juul made a lot of sense. Cigarette smoking continues to decrease in the U.S. so Altria needs to pivot if it wants to remain profitable. E-cigarettes and cannabis seem like the natural next step for the tobacco giant.
But now vaping is under increased scrutiny as more reports come out about lung illnesses among individuals who regularly vape. The CDC is currently investigating 450 cases and five deaths have already occurred.
The CDC doesn’t know what’s causing the illness and it’s possible these illnesses could be linked to some kind of contaminant. But even if that’s true, the scrutiny over vaping is unlikely to go away. This means any company promoting, manufacturing, or selling these products will be a target as well.
2. Juul’s questionable advertising practices
The marketing of e-cigarettes to teenagers is a huge problem. Vaping continues to grow in popularity among teens. One survey found that 37% of high school seniors said they used e-cigarettes in 2018. This is up from 28% in 2017.
This week, the FDA sent a warning letter to Juul over its faulty advertising practices and blatant marketing of its vaping products to teenagers. The FDA accused Juul of making presentations at schools claiming that e-cigarettes are safer than tobacco without an FDA order.
The FDA could fine or seize Juul’s products if it doesn’t change its advertising practices. And Juul’s success is now tied to Altria’s success. So this heightened scrutiny could affect the company’s stock.
3. The pending merger with Philip Morris
And finally, Altria is discussing a potential all-stock merger with Philip Morris. Most analysts agree the merger makes sense, though Altria did bring on some heat from investors. If the merger goes through, Altria stakeholders would be subject to a potential dividend cut.
And the merger is far from a done deal. It’s subject to approval from regulators and the boards of both companies. Altria has more to gain from the arrangement, so it remains to be seen if the deal will go through.
But even if it does happen, both companies will have to find a way to navigate a market that has become increasingly inhospitable to cigarettes and vaping.