Altria Smoked By Morgan Stanley Downgrade, Cites FDA Threats, Slowing Growth In Cigarette Business

A continuing societal shift away from traditional cigarettes, particularly among young people, is extinguishing enthusiasm for the maker of one of the most iconic tobacco brands, as Morgan Stanley downgraded Marlboro maker Altria Group Inc. MO.

The bleak picture comes even as Altria tries to move into what seems to be smoking’s future, having recently invested in e-cigarette company Juul Labs and cannabis company Cronos Group Inc. CRON.

The Analyst

Morgan Stanley analysts led by Pamela Kaufman downgraded Altria to Underweight from Equal-Weight and lowered her price target from $54 to $45.

The Thesis

Altria, parent company of Philip Morris, which makes Marlboro and several other major cigarette brands, is basically a victim of changing societal norms and tastes, Kaufman said, noting Morgan Stanley’s forecast of a speed up in the traditional tobacco industry’s decline.

Morgan Stanley said demographic modeling shows cigarette smoking volume declines of around 6 percent a year over the next decade, with young people not taking it up. Kaufman said Morgan Stanley sees a slowing of growth in Altria stock to the low single digits.

“Going forward, we expect the heightened volume declines to be the new norm,” Kaufman wrote in a note.

Regular pricing increases are at risk as well, she noted, not only because the smoking demographic is increasingly skewing toward low income consumers, but also because of competition from cheaper products that aren’t seen as carrying as much a health risk – including the e-cigarettes Altria is investing in with its recently-acquired stake in Juul.

Add to all that, the fear that the Juul investment comes with some risk from federal regulatory action.

The Juul, FDA Risk

While Juul does give Altria a hedge with a stake in a company making a rapidly growing product, it also comes with some risk from a “harsh” regulatory environment around e-cigarettes, and the “potential for more severe FDA regulation to come,” Kaufman noted.

And ironically, the growth of Juul and other e-cigarettes is likely coming at the expense of traditional cigarette makers, the analyst said.

Price Action

Altria shares were down more than 7 percent to $44.83 at time of publication.

Related Links:

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