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

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

Cigarette maker Altria Group Inc (NYSE: MO) reached an agreement with vape company Juul Labs in which the Marlboro parent company bought a 35-percent stake in Juul for $12.8 billion.

CNBC reported Thursday that the deal includes a $2-billion dividend payment from Altria to Juul employees, equivalent to about $1.3 million per staffer. 

What Altria Gains

The obvious benefit to Altria from its new investment in e-cigarettes is product and geographic diversification, Height Capital Markets' Stefanie Miller said in a research report. Altria's investment in Juul Labs likely makes it the tobacco company best-positioned to gain new revenue streams at a time when the stigma against tobacco harm continues, the analyst said. 

Altria's investment also gives it exposure to the international market, which can serve as a "nice hedge" if the vaping and e-cigarette market suffers from potential negative regulatory changes in the U.S. market, according to Height. 

Not Risk-Free

The biggest risk to Altria's multibillion-dollar investment is that the company fails to generate a return, Miller said. A scenario exists in which Juul Labs is completely banned from selling its products in the U.S., and this could have a ripple effect worldwide, she said. 

Juul Labs, backed by Altria, could oversee a compelling "grassroots advocacy and strategic communications strategy" to change the narrative in its favor, but a favorable outcome is "certainly not a foregone conclusion," according to Height. 

Juul's $12.8 Billion Comes At A Cost

One of the top priorities for Juul Labs is to create a new strategic communications strategy, Miller said: if the company already has one in place, the analyst said it's not doing a good job ahead of a "make-or-break" 2019 for alternative tobacco products.

On the other hand, Juul Labs' tie-up with a major tobacco player will harm its desire to be viewed as a "technology company that's making a smoking cessation product" rather than one that's in bed with big tobacco, Miller said.

Juul Labs has somewhat of a poor reputation among Wall Street and investors for targeting youth, the analyst said, meaning that teaming up with Altria could be the "final straw for many investors previously on the fence."

Related Links:

Analysts: Altria And Cronos Make A Good Team

Analysts Weigh In On The FDA's Position On E-Cigarettes, Menthols

Latest Ratings for MO

Mar 2021JefferiesUpgradesHoldBuy
Mar 2021CitigroupDowngradesBuyNeutral
Jan 2021Deutsche BankMaintainsBuy

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