Recently, the FDA ordered five brands - Juul, British American Tobacco's Vuse, Altria's MarkTen, Imperial Brands' Blu E-cigs, and Japan Tobacco's Logic - to submit their plans of discouraging use of their products by teens within 60 days. On the face of it, an FDA crackdown on e-cigarettes - one of Altria's fastest growing segments - should worry investors. However, when the crackdown also targets one of its biggest competitors in the space, which controls close to three-fourths of the market, it may actually be the best news the company has received in a while. Just three years after its formation, Juul Labs has already reached a valuation of $15 billion, as it continues its tremendous growth in this fast increasing market. Its market share has spiked from 32% in November 2017, to 60% in April, and further to almost 73% by September . One of the reasons cited for its tremendous growth trajectory is its increasing popularity with minors due to their appealing flavors, such as mango and mint. According to a survey conducted by the Truth Initiative , nearly 20% of middle and high school students have seen a Juul used in their school. In this note, we'll enumerate certain reasons why we feel this step may actually benefit Altria.
We have a $71 price estimate for Altria , which is significantly higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Our Outlook For Altria In FY 2018 to modify the assumptions and gauge the impact on the company's revenue, earnings, and price per share metrics.
Why This May Benefit Altria
1. Small Portion Of Total Revenues: In the year ended January 27, 2018, MarkTen garnered close to $200 million in sales. This forms a tiny fraction of the $25.6 billion total revenues Altria achieved in FY 2017. Consequently, an action by the FDA in the e-cigarette industry should not be much of a dampener on Altria's revenues.
2. More Mature Flavors: According to Wells Fargo analyst Bonnie Herzog, Altria could be well positioned in the face of this action by the FDA since it is well-versed with dealing with youth access to its products and has "limited/mature flavor profiles relative to Juul." As mentioned earlier, Juul's fruity flavors have been one of the main factors of their appeal to minors, and hence, may be the primary focus of the FDA.
3. May Force A Shift To Cigarettes: A move by the FDA to potentially take the fruity flavored e-cigarettes off the market may, in fact, prompt many users to shift back to traditional cigarettes. The growing popularity of Juuls had been a concern among Big Tobacco investors, as many had assumed the traditional tobacco giants would end up controlling this nascent market as well. However, Juul Labs' swift rise has taken everyone by storm. A Piper Jaffray survey of 19,000 Juul users revealed that 62% had been smokers when they started to use Juul, and about two-thirds of them quit after beginning to use the product. Consequently, a crackdown on this market, particularly on Juuls Labs, may put a hold on the cigarette market losing customers to the vaping industry.
4. Ability To Easily Afford Training Programs: As mentioned earlier, big companies such as Altria have a long history of combating youth access to its products. Moreover, with their vast coffers, they may be able to easily afford the training programs required to be given to retailers, which is highly likely to be one of the requirements of the FDA. A smaller company like Juul Labs may not fare so well in this regard.
5. Reduced Need For Investment: In order to better compete in the fast-growing e-cigarette industry, Altria has been undertaking significant research and development expenditure in this field, to make their products safer and more appealing to customers. Moreover, the company also spends a considerable amount on its marketing efforts for its products. On the other hand, a huge chunk of its revenues come from traditional cigarettes, which are high-margin products. A crackdown on this industry may consequently, warrant a reduced need for investment.
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