Shares of Altria (NYSE: MO) Reached nearly 7% on 12th September after Managing VP and General Counsel Murray Garnick discussed the cannabis market at the 2018 Barclays Consumer Staples Conference. Garnich explained that Altria "explored opportunities" and "evaluated market opportunities".
These news seemed to offset a negative development regarding Altria's e-cig business. The FDA issued a warning to tobacco companies stating that they would pull their e-cigarettes out of the store shelves if they stopped making changes to curb the teenager. The agency also released 1,300 warning letters to retailers of the top five e-cig brands in the US – Vuse, Blu, Juul, MarkTen XL and Logic – which make up 97% of the domestic market. It has also fined 131 retailers for selling e-cigarettes to teens.
Altria owns the brand MarkTen e-cig. British-American tobacco (NYSE: BTI) owns Vuse, Japan tobacco (NASDAQOTH: JAPAF) owns Logic and Imperial brands (LSE: IMB) owns Blu. Juul is produced by a start-up. However, the shares of all these tobacco stocks rebounded on Altria's comments, suggesting that investors believe that marijuana could help tobacco manufacturers move away from traditional cigarettes and e-cigarettes.
Would Altria really sell marijuana?
It seems a big step for a big tobacco seller to start selling cannabis, but some tobacco manufacturers are already on the market. Earlier this year, the tobacco company Alliance One International disclosed its investments in two Canadian medical marijuana companies – Island Garden and Goldleaf Pharm. A subsidiary of Imperial Brands also recently Co-invests in medical marijuana company Oxford Cannabinoid Technologies (OCT).
These investments do not mean that tobacco manufacturers start rolling in their factories. However, analysts repeatedly point out that cannabis sales could offset the continued decline in traditional cigarettes.
The US adult smoking rate has dropped from 20.9% in 2005 to 15.5% in 2016, and new FDA regulations (to reduce nicotine in cigarettes and restrict the use of flavored cigarettes, cigars and e-smoking). Cigarettes) could worsen the decline. Altria normally compensates for declines in cigarette deliveries through price increases and cost-cutting measures, but this treadmill strategy will not work forever.
Meanwhile, a survey by Yahoo News and Marist College last year found that over half of Americans tried marijuana, and 22% are current users (which means they used to smoke marijuana at least once or twice in the past year). , Smoking marijuana was once considered a crime, but 30 states have legalized it, and recreational use is now legal in nine states and in Washington, DC.
The FDA does not seem willing to stop this process, and its website encourages further research into medical use. In fact, the government could even promote the commercial production of marijuana to eliminate the black market, introduce official security standards and introduce new excise duties.
Would Altria give up e-cigarettes?
Altria and other tobacco manufacturers once claimed that selling e-cigarettes would reduce their reliance on traditional cigarette sales. However, sales of Altria's e-cigarette brands generate a tiny percentage of the company's total sales.
Altria sells its E-Cig brands with its verve nicotine "discs" and iQOS tobacco heaters in its "all-other" device, which generated only 0.3% of its sales in the first half of 2018. MarketTen XL remains an industry outsider According to Wells Fargo Securities analyst Bonnie Herzog, E-Cig's market share is 7% compared to Juul's 60% market share.
The expectation that the tiny business could become a pillar of growth seems like a miracle, especially as the FDA is apparently out to kill the e-cig market. Altria will probably not give up the e-cigarette market, but it's probably looking for other potential growth markets – like marijuana.
But let us not lead
Altria may be considering "options" for the cannabis market, but that hardly means it plans to mass-produce marijuana cigarettes soon. Investors should also note that Altria executives only mentioned these "options" after Barclays analyst Gaurav Jain brought them to the topic.
For the time being, investors should realize that neither the headlines of Cannabis nor E-CIG will have a major impact on Altria's growth. Instead, they should focus on the FDA's proposals for low-nicotine cigarettes that they could handle severe damage to his core business.