Will Altria sell marijuana and forget about e-cigarettes? – The fool

Actions of Altria (NYSE: MO) jumped almost 7% on Sept. 12 after Executive Vice President and General Counsel Murray Garnick discussed the cannabis market at the Barclays 2018 Consumer Products Conference. Garnich said that Altria "was exploring options" and "evaluating market opportunities".

This news seemed to offset a negative trend regarding Altria's e-cigs business. The FDA has issued a warning to tobacco companies, stating that they would remove their electronic cigarettes from store shelves if they did not make more changes to curb use in teens. The agency also issued 1,300 warning letters to retailers of the five largest e-cig brands in the United States – Vuse, Blu, Juul, MarkTen XL and Logic – which account for 97% internal market. It also fined 131 retailers for selling electronic cigarettes to teens.

Altria owns MarkTen e-cig. British American Tobacco (NYSE: BTI) owns Vuse, Tobacco Japan (NASDAQOTH: JAPAF) owns Logic, and Imperial brands (LSE: IMB) owns Blu. Juul is produced by a start-up. Still, the shares of all of these tobacco stocks rebounded after Altria's comments, suggesting that investors believe that marijuana could help tobacco companies diversify away from traditional cigarettes and electronic cigarettes.

Would Altria really sell marijuana?

This seems like a big step forward for a big tobacco salesman to start selling cannabis, but some tobacco companies are already putting their toes on the market. Earlier this year, Alliance One International, a tobacco company, announced investments in two Canadian medical marijuana companies: Island Garden and Goldleaf Pharm. A subsidiary of Imperial Brands as recently co-invested in the medical marijuana company Oxford Cannabinoid Technologies (OCT).

These investments do not mean that tobacco companies will start rolling joints in their plants. However, analysts repeatedly point out that cannabis sales could offset the ongoing declines in traditional cigarettes.

The smoking rate among adults in the United States rose from 20.9% in 2005 to 15.5% in 2016, and the new regulations proposed by the FDA (reduction of nicotine levels in cigarettes and limitation of consumption cigarettes, cigars and flavored electronic cigarettes) Altria generally offsets the decline in its cigarette deliveries through price increases and cost-cutting measures, but this treadmill strategy will not work forever.

In addition, a study by Yahoo News and Marist College last year found that more than half of Americans had tried marijuana and 22% were current users (that is, they smoked marijuana at least once last year). Smoking marijuana was once considered a crime. Yet 30 states have now legalized its use, with leisure use now legal in nine states and Washington, DC.

The FDA does not look forward to ending this process and its website encourages further research on medical uses. In fact, the government could even encourage the commercial production of marijuana to eliminate the black market, introduce official safety standards and impose new excise taxes.

Altria abandon electronic cigarettes?

Altria and other tobacco companies have already said that the sale of electronic cigarettes will reduce their reliance on traditional cigarette sales. However, sales of Altria 's electronic cigarette brands represent only a small percentage of the company' s total business figure.

Altria assembles its e-cigs with its Verve nicotine "disks" and iQOS tobacco heaters in its "all other" unit, which generated only 0.3% of sales in the first quarter. semester 2018. MarkTen XL 7% of the e-cigs market, according to Wells Fargo Securities analyst Bonnie Herzog, compared to 60% for market leader Juul.

Expecting small businesses to become a pillar of growth seems like a dream, especially since the FDA seems to want to destroy the e-cigs market. Altria is unlikely to abandon the e-cigarette market, but it is likely looking for other potential growth markets, such as marijuana.

But let's not take the lead

Altria could consider "options" for the cannabis market, but that does not mean that it plans to produce marijuana cigarettes in the near future. Investors should also note that Altria executives only mentioned these "options" when Barclays analyst Gaurav Jain pushed them to act.

For now, investors need to understand that neither cannabis stocks nor e-cig securities will have a significant impact on Altria's growth. Instead, they should focus on the FDA's proposals for low-nicotine cigarettes – which could treat serious damage to its core business.