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JUUL Continues to Unravel as Altria's (MO) Q3 Earnings Near

Christopher Vargas

Altria MO is set to report its third quarter results on Thursday, October 31 before the opening bell. Altria has seen its shares decline over 6% in 2019 thus far, lagging behind the broader tobacco market’s 9.2% run. JUUL Lab’s troubles continued today as a management shakeup resulted in the resignation of several executives at the e-cigarette company.

The unraveling at the executive level of JUUL comes just as Altria nears its third quarter report, which has many investors worried about the potential implications the e-cig health scare will have on the quarterly report.

JUUL Continues to Tread Water

The $12.8 billion investment Altria made in JUUL Labs for a 35% stake back in December has had investors uneasy ever since serious health concerns arose over the use of e-cig products. The health concerns caused major retailers like Walmart WMT, Kroger KR, and Walgreens WBA to suspend its sales of electronic cigarette products.

The FDA is cracking down on e-cigs as it proposes a ban of all flavored e-liquids to discourage teens from using the devices. The headwinds facing Altria’s investment in JUUL played a key role in Philip Morris International PM opting out of a potential merger with Altria.

The resignation of several JUUL executives comes as the latest setback for the battered electronic cigarette manufacturer. Several top executives went their sperate ways from the company, including Chief Administrative Officer Ashley Gould and Chief Financial Officer Tim Danaher, both veteran employees at the young start-up.

Chief Marketing Officer Craig Brommers, former marketing executive at Gap GPS and Abercrombie & Fitch ANF, also left the company as JUUL elected to suspend advertising. The onslaught of regulatory headwinds has also led to a major reorganization in the young company. It plans to cut 500 jobs, or about 10% to 15% of its total headcount, by the end of the year. Before the cuts, JUUL boasted about 4,100 employees.

Outlook

As the regulatory obstacles mount for JUUL, Altria must now try to provide financial numbers that can quell the outcry from shareholders. In response, Altria has utilized the inelasticity of demand in tobacco products to hike its cigarette prices three times this year.

However, the tobacco giant will not reap the benefits of its third price hike in its Q3 report, but it will see the impact of the past two price increases; these two price raises helped the tobacco firm post top and bottom-lines that grew on a Y/Y basis in Q2

Our Q3 consensus estimates forecast the company’s bottom-line to jump 5.56% to $1.14 per share and for sales to tumble 0.22% to $5.28 billion. Smokeable shipment volumes are expected to fall 6.58% and smokeless shipment volumes are projected to slip 2.09%. Wine shipments are expected to grow 3.4%. Looking ahead to the firm’s full fiscal 2019 figures, our estimates call for earnings to climb 5.01% to $4.19 per share and for sales to reach $19.72 billion for 0.48% leap.

Takeaway

Altria’s investment in JUUL continues to unravel before our own eyes as the onslaught of regulatory scrutiny continues to impact the young company’s operations. JUUL is in complete rebuild mode as it makes the cuts necessary to completely restructure the business from the ground up. Bringing in new faces to the company as well as rebuilding the company to better appease the concerned public will be crucial to salvaging the battered start-up. Altria sits at a Zacks Rank #3 (Hold).

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