Altria (NYSE:MO) shares are rallying Thursday morning, up 2.1%. The rally in Altria stock comes after the company reported its third-quarter results and updated investors on its Juul investment.
For those who haven’t been paying attention, Juul has run into a large number of difficulties lately. Vaping-related deaths and illnesses have been on the rise, and given Altria’s large investment in the company, it too has been suffering from the headlines.
If MO stock is able to hold onto its gains Thursday, perhaps it’s investors’ way of saying that the worst is behind it. Let’s look at the quarter, Juul and the charts.
Altria’s Third-Quarter Earnings Results
Non-GAAP earnings of $1.19 per share beat expectations by 4 cents, while revenue of $5.41 billion grew 2.3% year-over-year and beat analysts’ estimates by $70 million. Management reiterated its expectations to grow adjusted earnings by 5% to 7% this year. That translates to earnings in the range of $4.19 to $4.27 per share.
Management isn’t just focusing on the short term, but also the long term:
“We continue to believe the evolution of the tobacco industry represents a significant opportunity for Altria …We believe that, with current adult smoker trends and e-vapor disruption, it’s an opportune time to expand the availability of these options.”
However, despite a big-time hiccup in the vaping industry, management went on to say:
“In light of these considerations, we announce a compounded annual adjusted diluted EPS growth objective of 5% to 8% for the years 2020 through 2022 …We also expect to maintain our dividend payout ratio target of approximately 80% of adjusted diluted EPS during this period.”
That’s a very interesting take, as management apparently believes it will see a slight earnings acceleration for the next three fiscal years beyond 2019.
Why interesting? Well, first it’s actually down from management’s “aspirational” goal of 7% to 9% growth. But it’s also interesting because Altria took a $4.5 billion tax impairment charge for its Juul investment. Remember, Altria took a 35% stake in the company in December 2018 for $12.8 billion, valuing Juul at $38 billion.
Altria stock also has a 45% stake in Cronos (NASDAQ:CRON), which cost $1.8 billion.
The impairment charge swings MO to a GAAP loss of $1.39 per share for the quarter. Further, it reduces EPS for the first nine months of 2019 by 91%, reporting a profit of just 27 cents per share in that timeframe.
No Longer the Crown Juul?
Even though management is talking about 5% to 8% adjusted EPS growth from 2020 to 2022, it’s hard to feel like there isn’t some risk in that figure.
If Juul is facing issues now, what issues might it face in the future? To a neutral observer, the news may seem overboard as it pertains to vaping. But smoking is facing a societal shift as well.
Altria stock has been dogged by a decline in smokers. For 2019, management expects U.S. cigarette volumes to fall by 5% to 6% and for a roughly 5% annual decline to continue for several more years. Vaping and other growth avenues were supposed to be a way for Altria stock to sidestep this decline in growth.
While management remains upbeat about its three-year future, it clearly sees risk to its Juul investment. Risks include an “increased likelihood” for FDA intervention on flavored vaping products, as well as city, state and international bans on vaping products, among other concerns.
Juul also underwent a large c-suite shake-up. The CMO, CFO, CAO and others were let go just earlier this week. 500 others jobs will also be slashed under CEO K.C. Crosthwaite, who took over the helm just last month.
Vaping is unlikely to completely go away, but it doesn’t look like it will be the growth engine management was hoping for a year ago.
Trading the Altria Stock Price
Click to Enlarge
MO stock has been on a steady rally over the past month, climbing from $40 to $46 ahead of earnings. Maintaining above the 100-day moving average is attractive for bulls, but a large potential resistance mark looms above.
The 200-day moving average and 61.8% retracement have converged near $47.85. If the Altria stock price can’t reclaim $48 on its post-earnings rally — or if it does but fails to hold it — then it may still act as resistance going forward.
The setup is a simple one. If MO can clear and maintain $48, then a move higher can ensue. The first upside target is the 50% retracement near $50.50, with the August high of $51.46 above that.
If $48 acts as resistance, see that the 100-day moving average acts as support. Falling below that level puts the $43 to $44 area in play, where MO stock finds its 78.6% retracement, 50-day moving average and the backside of prior downtrend resistance.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
