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Altria Focuses on RRPs Growth, Closes Investment in Cronos

Zacks Equity Research

Altria Group, Inc. MO announced the completion of investment in the Canadian cannabis company, Cronos Group Inc. CRON. The deal, valued at $1.8 billion, will provide Altria 45% voting rights in Cronos. Moreover, the agreement entails a warrant, per which Altria can expand its ownership in the forthcoming four years. Had the warrant been brought into effect immediately, it would have augmented Altria’s ownership in Cronos to almost 55%. Exercise price of the warrant is nearly $1.0 billion. Let’s take a closer look at how this deal is likely to aid Altria.

Expansion in Low Risk Tobacco Space Bodes Well

With the legalization of recreational use of marijuana in Canada, many companies are foraying into the cannabis space. In fact, companies are monitoring the health impacts of cannabis and have started viewing cannabis-infused products as another recreational option.

Altria is the first tobacco player to depict interest in cannabis. The deal with Cronos is likely to augment the company’s offerings in low-risk tobacco alternatives and explore growth prospects in the nascent but booming cannabis arena. Moreover, by collaborating with Altria, Cronos is expected to attain greater resource strength, market reach as well as improve product development and commercialization capabilities.

Clearly, the move resonates well with Altria’s strategy to bolster footing in the reduced risk products (RRPs) space. Progressing on such lines, Altria recently acquired 35% stake in JUUL Labs Inc for nearly $12.8 billion. JUUL is well-known for advanced and highly differentiated e-vapor products.

Further, we note that Altria’s flagship MarkTen and Green Smoke e-vapor products are performing strongly in the smokeless category. Also, the marketing and technology sharing agreement between Altria and Philip Morris PM, which is currently under FDA review, is expected to boost business of the companies. Additionally, Altria is working on receiving FDA approval for the marketing of smokeless products with lower risk claims.

Such radical efforts to strengthen the smokeless category is likely to boost the company’s performance in the forthcoming periods. Markedly, e-cigarettes and similar RRPs are viewed as the future products for tobacco companies. However, the FDA is keeping close tab on the manufacturing and marketing policies of RRPs to regulate usage among youths. Other tobacco companies such as British American Tobacco BTI are also expanding their presence in the e-cigarette’s arena.



 

Will Efforts Offset Challenges?

Declining cigarette sales volumes, stemming from fading consumer enthusiasm and regulatory hurdles, have been marring Altria’s performance for a while. During fourth-quarter 2018, domestic cigarette shipment volumes fell 4.4% year over year. Prior to this, the company’s cigarette shipment volumes declined 3.7%, 10.6% and 4.2% in the third, the second and the first quarters of 2018, respectively.

With increasing vigilance on tobacco products, it is hard for the company to escape from impacts of deteriorating cigarette sales. Against such a backdrop, the company’s gradual expansion in other business areas is expected to offer respite to a certain extent. Apart from RRPs and the cannabis space becoming a game changer, higher cigarette pricing is boosting revenues. Such upsides are fueling investors’ optimism in this Zacks Rank #3 (Hold) company. Evidently, the stock gained 5.6% in the past three months compared with the industry’s increase of 9%.

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

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