The Real Reason Altria Stock Is a Safer Bet Than Before
Food and Drug Administration Commissioner Scott Gotlieb is stepping down from the job after two years in the top role at the FDA. But before he goes, he’s going to make life miserable for manufacturers of e-cigarettes like Altria (NYSE:MO) and Juul, giving owners of MO stock a panic attack.
Source: Peyri Herrera via Flickr (Modified)
“The e-cigarette industry has been overly dismissive” of the risk that kids could become addicted to nicotine through e-cigarette use, Gottlieb said March 19 at the Brookings Institution. “We’re capturing an exploding epidemic right now.”
So much for leaving the building and exiting quietly into the good night.
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A Worthless Investment
Shareholders of Altria are now sweating the fact that the FDA could pull pod-based e-cog products from the market leaving the company with a potentially worthless $13 billion investment it made in Juul back in December.
I’m facetious, of course. Nothing is ever as bad as it first appears. I’m sure Altria and Juul and the rest of the e-cig manufacturers will figure out how to give the FDA what it wants without losing a significant revenue stream.
Too much is at stake for that to happen. Although, these companies better hurry because if more cities like San Francisco play hardball with them, it might not if the FDA gives them a clean bill of health.
“I don’t eventually want to see them leave this city,” San Francisco Supervisor Shamann Walton said about two bills the politician is co-authoring to restrict the sale of e-cigs. “I would have liked for them to have been gone yesterday.
Juul’s headquarters are in the city.
A Better Investment At Bargain Basement Prices
In December, I wrote that Altria got a steal when it paid $1.8 billion for Cronos (NASDAQ:CRON), a Canadian cannabis company that focuses on the medical market.
And even though it’s got tiny revenues compared to Juul — $10.1 million in the first nine months of 2018 for Cronos compared to $1.5 billion in annual revenue for Juul — the pot of gold at the end of the rainbow makes the smaller investment of the two, the better one too.
“In the U.S. alone, the demand (legal and black market) for recreational marijuana is estimated to be between $50-55 billion putting it ahead of video games and firearms and within $30 billion of cigarettes, which got a 400-year head start on the wacky weed,” I wrote Dec. 31, 2018.
By comparison, experts suggest that the global market for e-cigs could hit $50 billion annually by 2025, six years from now.
That’s assuming the FDA doesn’t rain on Juul’s parade.
The reality is that Juul and the rest of the e-cig makers are the opening act and cannabis companies like Cronos and Canopy Group (NYSE:CGC) are the main attractions.
Although I argued that Altria made the Juul investment to cover its bases if cigarettes disappear completely, I don’t think CEO Howard Willard realizes just how much of a bargain he got buying effective control of Cronos for less than $3 billion.
Think about it.
Altria’s most recent 12-month free cash flow is $8.2 billion. It has gained a prime piece of cannabis real estate for less than 35% of its 2018 free cash flow generation.
Worst case scenario: Cronos goes into the garbage bin of history. The company is not going to lose sleep over $3 billion. After all, it was willing to spend four times that for Juul.
Best case scenario: The cannabis market worldwide is bigger than anyone imagined and Altria’s got a major seat at the table. It will make cigarettes look like an afterthought.
The Bottom Line on MO Stock
If you own Altria stock, I’d be a heck of a lot more concerned about the company’s investment in Juul than I would Cronos, for the reasons I’ve just explained.
Cronos is, in my opinion, the jewel in Altria’s crown.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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