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Can Smokeless Unit Help Altria Pare Low Cigarette Sales?

Zacks Equity Research

Receding cigarettes sales volumes are weighing on the performance of most tobacco companies, including Altria Group, Inc. MO. Nevertheless, the tobacco giant is keen on boosting offerings in the smokeless tobacco or reduced risk products (RRP) unit. Let’s take a closer look.

Strides in the Smokeless Arena Bode Well

Rising health consciousness and the adverse impacts of cigarettes have propelled consumers to shift to other low-risk alternatives. Altria, which offers several low risk tobacco products, frequently undertakes acquisitions and partnerships to bolster presence in this space.  Recently, the company inked a deal to acquire 80% stake in Burger Group (Burger Sohne Holding AG), to commercialize the oral tobacco-derived nicotine (TDN) pouch product — on!

The company’s newly formed subsidiary, Helix Innovations LLC, will act as the parent entity for the acquired companies of Burger Group. Upon closing of the agreement, Altria will invest nearly $372 million in Burger Group. The transaction is likely to be completed in the second half of 2019.

Management believes that on! is a worthwhile addition to the smokeless portfolio, as oral TDN products are rapidly becoming popular in the United States owing to their low risk claims. Apart from this, we note that the MarkTen and Green Smoke e-vapor products are performing strongly in this smokeless category. Also, the marketing and technology sharing agreement between Altria and Philip Morris PM, pertaining to the sale of IQOS in the United States, has been approved by the FDA. This is expected to boost business of the companies.

Additionally, Altria is striving to receive FDA approval for the marketing of smokeless products with lower risk claims. In this respect, the company has submitted a modified risk tobacco product application to FDA for Copenhagen Snuff. Moreover, Altria has acquired 35% stake in JUUL Labs Inc for nearly $12.8 billion. The company has also applied for converting its non-voting interests in JUUL to voting securities. JUUL is well-known for advanced and highly differentiated e-vapor products. Additionally, it is interested in expanding in the nascent but booming cannabis industry. This is evident from the acquisition of stakes of the Canadian cannabis company — Cronos Group CRON — for nearly $1.8 billion.

Wrapping Up

We note that during first-quarter 2019, domestic cigarette shipment volumes fell 14.3% year over year. This was preceded by declines of 4.4%, 3.7%, 10.6% and 4.2% in the fourth, the third, the second and the first quarters of 2018, respectively. Such weak trends may persist, thanks to tight regulations and consumers’ shift in preferences. In fact, management expects domestic cigarette industry volume to decline in the range of 4-5% in the forthcoming periods. Apart from Altria, falling cigarette sales volumes are hurting other tobacco players like Philip Morris and British American Tobacco BTI.

Amid such a scenario, Altria’s gradual expansion in other business areas, such as RRPs, is expected to offer respite to a certain extent. This, combined with higher cigarette pricing strategies is likely to drive growth.

This Zacks Rank #3 (Hold) stock has inched up 0.5% in the past three months, against the industry’s decline of 6.7%.

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

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