When we last spoke about Altria (NYSE:MO), we concluded
MO's acquisition was extremely ill-timed. It likely did face pressures of acting, in case some other tobacco company moved first. But by doing so, it created the typical first mover disadvantage at likely the worst possible time. The value destruction is obvious to us. That said, MO is now at a reasonable valuation where the risks of declining sales and even the silly acquisition are priced in. We were negative on the stock earlier and now think that it is much closer to fair value.
Source: Altria: I Pity The Fool Who Paid $36 Billion For JUUL
Since then, the stock has continued to tumble with Morgan Stanley's (MS) latest note striking more panic in the heart of bulls. The recent FDA speech made even the most ardent bulls take notice that the FDA is now very close to intervening in the market. The key takeaways from that speech were,
- FDA is concerned by an alarming rise in use of e-cigarettes, particularly JUUL among teenagers.
- From 2017 to 2018, there was a 78% increase in current e-cigarette use among high school students and a 48% increase among middle school students. The total number of middle and high school students currently using e-cigarettes rose to 3.6 million — that’s 1.5 million more students using these products than the previous year.
- FDA has already taken steps to address this and basically will not stop until this trend is reversed.
- If that means a complete ban of e-cigarettes, they are ready to go there.
While investors may downplay that a complete ban will not happen, absolutely any kind of containment of JUUL growth means Altria will be taking an epic write-down.
When you pay nosebleed valuations, things better work out well
We had
