Altria (MO) in Talks to Unite With Philip Morris, Stock Down

Altria Group Inc. MO announced that it is in talks with Philip Morris International, Inc. PM to discuss the potentials of an all-stock merger. However, there is no assurance that these discussions will lead to an agreement to the transaction, as highlighted by the companies. Also, they have refrained from providing additional details regarding the potential union, until deemed appropriate.

More than a decade ago, Altria and Philip Morris had parted ways that created a divide between domestic and international operations. In case of a merger, the combined entity is likely to become a massive enterprise with supreme footing in the tobacco space.     

However, the market doesn’t seem enthusiastic on this development. Shares of Altria and Philip Morris deteriorated nearly 4% and 8%, respectively, in yesterday’s trading session.

We note that Altria’s shares have plunged 22.5% in the past year compared with the industry’s decline of 15.4%. Let’s take a look at the factors that are exerting pressure on the performance of the tobacco giant and efforts undertaken by the company in the low-risk products space.

Regulatory Barriers Hurt Cigarettes Sales

Altria reels under regulatory impositions on cigarette manufacturing and related marketing polices. This includes mandatory use of precautionary labels and issuing self-critical advertisements. Also, consumers’ growing awareness toward the harmful impacts of nicotine is a deterrent.

These factors are denting cigarette sales volumes for Altria and Philip Morris. Other tobacco firms such as British American Tobacco BTI are also reeling under pressures from such adversities. We believe that escaping the adverse impacts of such regulatory barriers may be tough for Altria and Philip Morris, even if they consider a merger. In fact, Altria expects domestic cigarette industry volume to decline 5-6% in 2019.

Goals Regarding a Smokeless Future

Tobacco companies are looking toward expanding in the low-risk tobacco alternatives or smokeless arena. Reduced risk products (RRPs) such as e-cigarettes are rapidly gaining traction. In fact, Altria holds 35% stake in JUUL Labs Inc, a leading e-cigarettes maker known for its advanced and highly-differentiated products. Similarly, Philip Morris’s IQOS is performing well. Moreover, the FDA’s approval of the sale of IQOS in the United States is likely to be a boon for the companies. Altria, currently carrying a Zacks Rank #3 (Hold), has also undertaken efforts to expand in the cannabis industry. It has acquired the stakes of the Canadian cannabis company, Cronos Group CRON.

Markedly, Altria and Philip Morris are putting emphasis on the expansion of RRPs. This shared objective might receive a boost, if at all they consider to unite. The combined resources, brand strength and expertise might lead to better product development and advancements in the category. However, the FDA is keeping a close tab regarding the marketing policies of e-cigarettes to regulate its usage among the youth.

Wrapping up, there is indeed much ambiguity surrounding the merger. So, let’s wait and see how matters unfold in the forthcoming periods.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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