If the markets are any indication, America and the world are falling away from their cigarette love affair. The usually reliable Altria Group Inc (NYSE:MO) is off to a horrific start this year, with MO stock shedding 18%. It’s a far cry from last year’s exploits, when MO returned slightly more than 9% for shareholders.
Even worse, since the start of the week beginning Apr. 16, Altria stock evaporated 10% market value. Shares remain mired in a bearish trend channel that began around late December of last year. Try as it might to break out, MO kept charting a series of lower highs and lower lows.
For technical analysts, the recent break below $60 was highly discouraging. This level represents long-term support which goes back to summer 2016. In short, MO stock must regain its footing quickly due to the significant technical damage. Otherwise, the bears will become emboldened, potentially triggering a slide to $50, or worse.
So what happened? Global rival Philip Morris International Inc. (NYSE:PM) produced what several analysts perceived as a sour Q1 2018 earnings report. It wasn’t the actual earnings which were the issue; Philip Morris hit $1 against a 90-cent consensus estimate. No, the problem was President Trump’s favorite target: the Japanese.
Simply put, Japanese smokers weren’t transitioning quickly enough to iQOS, Philip Morris’ heat-not-burn tobacco device. Given the country’s ravenous smoking appetite, PM depended heavily on Japan’s iQOS sales. When that growth failed to materialize in Q1, Wall Street punished PM, as well as MO stock.
What does this actually have to do with Altria? Philip Morris requested FDA approval for iQOS. If granted, Altria has exclusive American distribution rights.
I get the implications. Still, the selloff in Altria stock is too harsh.
Heat-Not-Burn Technology Is Still a Winner for MO
First, the slowing or maturing growth in Japan’s iQOS sales needs broader context. The Japanese smoking market absolutely loves cigarette alternatives. The iQOS is the clear winner, beating out similar heat-not-burn devices from vaporizer companies Ploom and Glo.
We also have to consider that Japan will host the 2020 Summer Olympic Games. At least for the next two years, the Japanese government will pressure its citizens to kick the habit altogether. Plus, it’s one quarter. Despite overall declines, young, particularly male smokers who are more inclined to use heat-not-burn devices represent a strong consumer base.
But the more important issue, especially for MO stock, is that iQOS is a promising cigarette alternative. As I mentioned in my previous Altria write-up, vaporizers and e-cigarettes are the new craze in the smoking world. However, most vaporizers do not replicate the smoking experience very well. As a result, many ex-smokers lose the prefix when they abandon vaporizers for the real thing.
I’m not a smoker, so I can’t personally test the difference between vaporizers and iQOS. However, one vaping enthusiast who was a former smoker reviewed the device and stated that the experience “phenomenologically” was exceptionally close to real cigarettes.
It’s not my field of expertise, so I’ll take his word for it. However, the concept makes perfect sense. Tobacco companies like MO obviously specialize in the “earthy,” tobacco experience. Vaporizers are almost exclusively made in China and represent a different subculture.
To the outsider, heat-not-burn devices and vaporizers look the same. In reality, vaporizers focus either on blowing huge clouds of vapor or enjoying a rich library of flavors. Heat-not-burn devices exclusively focus on delivering an authentic cigarette experience.
The end game is completely different, which favors Altria stock.
Don’t Forget the MO Fundamentals
One last thing I want to point out for MO is the fundamentals. For the last fiscal year, Altria produced an earnings per share of $3.39, which beat the $3.28 consensus target. For 2018, analysts expect EPS to hit $3.98, or a 17.4% increase over 2017 actuals.
Against the current MO stock price, we’re looking at a 14.5 price-earnings ratio. Against prior years’ data, this is a significantly undervalued metric. Plus, sentiment might sour in the nearer term, making Altria even more undervalued.
I don’t think this situation will last. Philip Morris’ selloff based on one quarter’s worth of data was excessive. The reality is that heat-not-burn devices can do serious damage in the consumer market because vaporizers don’t address ex-smokers’ needs. Therefore, don’t be quick to give up on Altria stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.