The tobacco market is an interesting one, to say the least. They are selling to consumers who are quite literally addicted to their products, and with large yields, they have proven to be fairly stable investments over the years. Altria (MO) has been trying to offset the relatively stable decline in teen and adult smokers by raising prices. Bulls will point out that population growth should help offset the decline. But hidden behind the investment is the sentiment from hedge funds who believe that this has been a declining business for 30 years.
Altria, trying to stay ahead of its time and move to the increasingly popular flavored vapes, has decided to purchase a 35% stake in Juul. Once heralded as a company with the mission to turn adult smokers into Juul smokers, they have been slowly moving away from this narrative and embracing the company for what it is- a sham to move cigarette smokers onto more addictive vapes, and to keep them captivated with new flavors and increased nicotine levels. One Juul pod contains more nicotine than a whole pack of cigarettes.
I like this move here from Altria. Sales have been flat for them and the stock was down 27% on the year before the move. Even after the move, the stock has moved more than 10% lower to new yearly lows after details regarding the investment were revealed. The investment valued Juul at around $36 billion, more than double its $16 billion valuation last year. The move values Juul at 36X sales, because in 2017, Juul did around $1 billion in sales. This valuation is almost upresedented, and raises concerns if the government continues to crack down on the large market Juul has in teenagers, and if taxes and regulation pushes the costs of these devices even higher.
Overall, I have been quite bearish on Altria in the past. Combining the slowing growth and competition from e-cigarette manufacturers, I thought they were going to be in trouble, as they were carrying a high valuation compared to their peers. Because of the market slip and sentiment about this investment, fear is now heavily priced in to the stock. While I'm not completely positive on it now, I think this is a compelling argument for an investment and I believe Altria set themselves up well in the long run.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.