Altria’s move to placate regulators on teen smoking is smart, analyst says

Altria’s decision to proactively respond to a regulatory crackdown on tobacco products that appeal to teenagers is a positive that positions the company well in appeasing antismoking advocates and addressing the competitive pressure from rival Juul, one analyst said Thursday.

Altria Inc.

MO, +1.48%

 said that it is pulling its MarkTen Elite and Apex by MarkTen e-cigarette pods from off store shelves until it either gets the U.S. Food and Drug Administration’s blessing to sell them, or the issue of teens becoming addicted to nicotine is otherwise resolved, the company said in its third-quarter earnings release.

The company will also stop selling products with any flavors other than regular tobacco, mint or menthol. The FDA recently announced a review of teens and e-cigarette smoking, with top official Commissioner Scott Gottlieb decrying an epidemic, driven by the availability of smokeless products. Much of his ire was directed at Juul Labs, which has been marketing a line of online products with flavors including “crème brûlée” and “cool cucumber,” that contain high levels of nicotine and resonate strongly with young people.

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Related: Why smoking among teens has reached historic lows

Gottlieb said efforts to convert adult smokers to less harmful e-cigarettes shouldn’t come at the expense of younger people’s health. The FDA is planning to release evidence of its findings next month and is considering a ban on flavored e-cigarettes and further restrictions on online sales.

“Although we don’t believe we have a current issue with youth access or use of our E-vapor products, we are taking this action because we don’t want to risk contributing to the issue,” Altria Chief Executive Howard Willard told analysts on a call to discuss quarterly results, according to a FactSet transcript. “Additionally, we will support federal legislation to establish anyone as the minimum age to purchase any tobacco product.”

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The company estimates that about 5% of adult tobacco users are legal age through 20 and that they account for about 2% of cigarette industry volumes, 4% of smokeless industry volumes and 15% of E-Vapor industry volumes, he said.

“We view Altria’s proactive decision to remove MarkTen Elite & Apex pod products and to restrict its cig-a-like product flavors pending a market order from the FDA or clarity on youth access as positive,” said Wells Fargo analyst Bonnie Herzog. She reiterated her outperform rating on the stock.

Willard disappointed those investors who were hoping today’s release would be accompanied by some kind of news about a move into the cannabis sector. Asked on the call to elaborate on plans, the CEO reiterated that the company is exploring opportunities in the space, on the grounds that cannabis may not always be federally banned.

‘I’ll hold back on explaining in more detail kind of how we view the category because we are relatively early in our exploration,” he said.

Canada’s move to fully legalize cannabis for adult recreational use and the growing number of U.S. states that allow it for either medical or recreational use have fueled excitement that a legal sector is emerging that may be worth billions of dollars. Drinks companies, notably Constellation Brands Inc.

STZ, +0.73%

have made moves in the sector; Constellation has invested $4 billion in Canada’s Canopy Growth Corp. and others are said to be eyeing the sector.

For all of MarketWatch’s coverage of Canadian legalization, click here.

Tobacco companies are widely viewed as a natural fit for the sector, but big players are wary of the federal law, which continues to classify weed as a Schedule I drug, placing it in the same category as heroin and cocaine. That ban has made it impossible for companies to have bank accounts with institutions that are federally backed and blocked them from capital markets.

Altria posted net income of $1.94 billion, or $1.03 per share, for the third quarter, up from $1.87 billion, or 97 cents per share, for the same period last year. Adjusted per-share earnings came to $1.08., ahead of the FactSet consensus of $1.06.

Revenue climbed to $6.84 billion from $6.73 billion, while revenue net of excise taxes was $5.29 billion. The FactSet consensus was for revenue of $5.21 billion.

The company narrowed its full-year adjusted EPS guidance to a range of $3.95 to $4.03, which compares with a consensus of $4.00.

Shares were flat in early afternoon trade, but are down about 13% in 2018, while the Dow Jones Industrial Average

DJIA, +1.59%

is up 0.6% and the S&P 500

SPX, +1.92%

 has gained 0.7%.

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