3 Reasons Altria Group Inc. Stock Could Fall

Altria headquarters. Source: Altria.

Tobacco giant Altria Group has consistently defied its naysayers, staving off threats ranging from litigation to regulation and anti-smoking advocacy. Yet despite its success in battling its foes, Altria nevertheless has to deal with the fundamental weaknesses of the tobacco industry, clamoring to maintain and grow market share even as more people join the ranks for former smokers. Let’s look at three of the biggest threats to Altria that could send its stock downward in the future.

1. Poor third-quarter earnings could make investors skeptical about Altria’s growth prospects.
Despite Altria’s long-term performance, investors still pay a lot of attention to short-term results. For instance, in July, Altria shares dropped after the company proved unable to sustain year-ago revenue levels. Despite a nearly 5% rise in earnings per share and an increase in the company’s guidance for full-year EPS figures, Altria’s cigarette volumes fell 4%, leading to a drop of almost 1% in sales. Although the smokeless and cigar segments performed well, cigarettes remain a problem area for Altria and could continue to struggle.

Even with relatively modest expectations, further disappointment from Altria could lead some investors to decide that the best of times for the tobacco giant are over. That would likely be a short-sighted assessment, but the risk of having to deal with short-term pain could lead some risk-averse investors to look for cheaper entry points to mitigate risk.

Source: Altria.

2. If menthol cigarettes take off, Altria could get left behind.
One of the biggest threats to Altria from the proposed merger between Reynolds American and Lorillard is the fact that a combination of the No. 2 and No. 3 domestic tobacco manufacturers would allow the combined Reynolds American to dominate the menthol cigarette space. Currently, Lorillard’s Newport brand and Reynolds American’s Kool brand are the top two cigarettes in the menthol arena, and putting both of those brands under one roof would give the company a crushing advantage in menthol.

Menthol cigarettes have been under fire lately, with some believing regulators could put major restrictions on the sales of menthol-based products. Yet with a federal court disallowing the use of an FDA panel report on menthol because of alleged conflicts of interest among members of that panel, Lorillard and Reynolds have fended off any adverse ruling, at least temporarily. If menthol products become more popular, it would leave Altria in the unusual position of trying to catch up with its rivals.

3. Altria’s ventures in electronic cigarettes and vapor products might not pan out.
With cigarette volumes on the decline, Altria has many investors convinced that alternative products like electronic cigarettes and vapor products represent the future of the company’s growth. Certainly, Altria has made extensive forays into the e-cigarette space, with the ramp-up of its MarkTen e-cigarette brand having made substantial progress in recent months. With tens of thousands of retail locations making MarkTen available, Altria is counting on the popularity of e-cigarettes to drive sales going forward. Moreover, Altria recently spent $110 million to purchase the vapor business of privately held Green Smoke, betting further on customers being interested in nontraditional ways to inhale nicotine.

The main problem is that Altria didn’t start emphasizing its electronic cigarette and vapor products until quite recently, leaving it as a laggard behind Lorillard and other major players in the space. Altria might well dodge a bullet on the e-cig front if the Lorillard/Reynolds merger goes through, thanks to provisions that would force Lorillard to divest its blu brand of e-cigarettes. Altria has managed to stand up to blu in some test markets, but it remains to be seen if Altria and MarkTen have the staying power to remain competitive over the long run.

Altria has performed well lately, but any stock is always vulnerable to downward moves. If some of the favorable conditions for Altria start to turn ugly, then a share-price decline could easily reverse at least some of the stock’s recent gains.

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