Andrew Willis: Smokers looking to get off cigarettes, and investors looking to seize new opportunities in the nicotine space have had their hopes dashed – for now.
With wounds from the recent vaping health scare still fresh, E-cigarette company Juul has been hurting from accusations it was marketing its highly addictive products to teens.
In the fallout of a potential clampdown from the U.S. Food and Drug Administration, the proposed merger between Juul parent company Altria (MO) and Philip Morris International (PM) has been called off.
And that has us lowering our fair value estimates for Altria from $58 U.S. dollars to $56. Our sector director, Philip Gorham, says the “implosion” of the vaping category may disrupt the market for several quarters to come.
Now Altria does own Philip Morris USA, which means it that it still owns traditional tobacco brands such as Marlboro and Benson & Hedges. But Gorham says Altria is no longer a pure play on U.S. cigarettes.
Asides from the liability of Altria’s stake in Juul, Gorham notes that it faces an uphill situation with the rollout of the iQOS device it licensed from Philip Morris International, a new ‘tobacco heating’ device that purports to provide a nicotine hit with less health risk than conventional cigarettes.
The problem with the iQOS device is that it’s a hard sell at a hundred U.S. dollars, says Gorham, and because of the failed merger with Philip Morris International, Altria will owe royalties – all at the cost of cannibalizing its traditional tobacco line.
But heated tobacco is the category most likely to wean smokers off cigarettes, says Gorham, adding that the margins for Philip Morris International will benefit from a decline in vaping. He predicts iQOS will take 3% of the tobacco market by 2023.
We’re maintaining our fair value estimates for Philip Morris International. They have little exposure to the vaping market, benefit from a wide moat and “almost insurmountable barriers to entry”.
And for better or for worse, in most markets the smoking rate is in only a very modest decline with almost insurmountable barriers for consumer to exit.
For Morningstar, I’m Andrew Willis.
