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Altria
The group's shares (ticker: MO) have been affected by lower cigarette volumes, but Wells Fargo says that a powerful pricing power can offset this trend.
The story back. We all know now that 2018 has been difficult for consumer staples stocks and even more so for tobacco companies. It all comes down to steam: e-cigarettes are taking more and more market share in traditional products. Juul Labs was the big winner in the United States (where big tobacco has not yet been able to introduce its own devices) and, although Altria is at least somewhat exposed to this market Growing fast through its participation in Juul, some claim that it is too high price. All of this has resulted in a faster than expected decline in cigarette volumes, as well as a negative sentiment on equities and peers.
Philip Morris International
(PM), especially since the Food and Drug Administration is also planning to fight against menthol.
The Twist of the plot. Expectations being so low, Altria followed the release of its earnings report, better than expected, and Philip Morris also benefited from a spurt for the post-profit, with the CEO Barron's that the company has nothing to fear from new entrants in vaping. Philip Morris has recorded double-digit gains since the beginning of the year, although Altria remains plagued by small losses.
Moving forward. While vaping is the headline story, investors would do well to remember the power of pricing, said Wells FargoS Bonnie Herzog.
Pricing power is an important tool for tobacco manufacturers: since smoking rates (at least for traditional cigarettes) are declining, rising prices help tobacco companies to control income flows at home. as they decrease. This is another reason why e-cigarettes are causing so much concern: their popularity means that traditional cigarettes are less attractive, making price increases more difficult, and higher prices could push current smokers to use vaping devices faster than Altria and Philip Morris wish. their iQOS product has still not received approval in the United States
Herzog claims, however, that investors are too pessimistic on this point. His research suggests a further rise in the price of cigarettes for future increases, perhaps in the second half of March, to levels comparable to previous increases, which reinforces his confidence in Altria's pricing power. .
Her long-term bull thesis has not come to fruition yet, but she writes that the new partnership with Juul should soon begin to bear fruit: vouchers for her products will soon be included in Altria's Marlboro brand cigarette packs. . "Even if we expect some Marlboro cannibalization, we continue to believe that economic considerations are playing out in Altria's favor, with the latter gaining 35% of Juul's growing revenue base, which increases dramatically as markets connect ("nothing but the net"). ). "This puts Altria in a good position because the company is" even better aligned today than it has ever been with the FDA's vision of a smoke-free future. "
Altria is down 1% to $ 48.21 in recent deals, partly spoiled by the harsh words of the FDA.
Write to Teresa Rivas at [email protected]
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