Disagreement On The Street Over Whether Juul Will Be Enough For Altria

Juul vaping cartridge sales were on fire this past year, giving Wells Fargo a buzzy feeling about Altria Group Inc. MO following this week’s earnings report. But Morgan Stanley wasn’t convinced vaping will offset the continuing decline in traditional cigarettes.

Altria reported fourth-quarter adjusted earnings per share of 95 cents, roughly in line with Street expectations. But the part of its report that got the most notice was the spike in Juul Labs revenue, which passed $1 billion, seven times what it was the previous year. The legacy Big Tobacco company’s earnings call was closely watched because it was its first since acquiring a 35-percent stake in Juul last year.

The Analysts

Wells Fargo Securities analyst Bonnie Herzog was the more bullish on Altria, reiterating an Outperform rating and a $65 price target, seeing strong opportunity for the company once known for Marlboros with its stake in Juul.

Morgan Stanley’s Pamela Kaufman was decidedly more bearish and kept her Underweight rating and $45 price target on the stock, saying vaping won't offset (and will even help speed up) the demise of the cigarette.

Altria shares traded at $48.96 Friday afternoon.

Wells Fargo

Herzog likes the high visibility of Juul and the opportunity she sees for the vaping company to boost overall Altria fortunes. The rest of the market, Herzog said, is missing the degree to which the product could save a company previously pinned to what some see as a dying tobacco industry.

“We...are incrementally more bullish on MO’s decision to acquire a 35 percent stake in JUUL,” Herzog wrote in a note. She acknowledged a speed-up in the decline of cigarette sales, but said Juul’s strong U.S. share and margin growth, along with good prospects internationally, present upside that is underestimated.

Herzog did acknowledge some uncertainties, including the possibility of stronger federal regulations on e-cigarettes. But, she said, strong Juul growth internationally combined with a working cost reduction program in the larger Altria operation should enable earnings growth for several years to come.

Morgan Stanley

Kaufman isn’t yet hooked on Juul.

Kaufman noted that Altria expects Juul’s international business to represent about half the company’s revenue by 2023, but is more concerned about the risks.

“While MO will benefit from JUUL's growth, we see risk from higher cigarette cannibalization, the impact from lower nicotine caps/lower barriers to entry in international markets, and FDA risk,” Kaufman wrote in a note. Even modeling in Juul growth, Kaufman said, Morgan Stanley believes “the contribution will be offset by weaker growth in MO's core business.”

Related Links:

Analysts: Altria's Juul Stake A Good Hedge, But Lack Of Control Presents Risks

The Positives, Negatives Of Altria's $12.8-Billion Investment In Juul Labs