Fitch credit analysts, Bill Densmore and Carla Norfleet Taylor, wrote in a note Oct. 8 that they believe Altria (NYSE:MO) will have to write down the value of its 35% stake in Juul Labs in light of the vaping scandal gripping the nation. Needless to say, if you own Altria stock, you’re more than a little concerned about the company’s $12.8 billion investment in Juul.
On Oct. 4, the Wall Street Journal reported that Darsana Capital Partners, a New York City-based hedge fund, recently wrote down its investment in Juul Labs, giving it a valuation of $24 billion, down from its $38 billion value in December 2018.
A quick piece of math tells me that Altria’s investment in Juul is now worth $8.4 billion, $4.4 billion less than what it paid at the end of 2018.
With Juul’s investment looking less than stellar, the cigarette maker’s investment in Cronos Group (NASDAQ:CRON) isn’t looking nearly as bad. Here’s why that’s a good thing.
Altria Got a Bargain
In my most recent article about why Altria’s investment in Cronos was positive for CRON stock, I gave readers three reasons why I thought it made sense. Now, as the vaping scandal seems to be intensifying, I wonder whether Altria’s brain trust spent enough time thinking about the downside of its e-cigarette investment.
“Altria would not have made a $12.8 billion investment in Juul Labs or a $1.8 billion investment in CRON stock if it didn’t understand the health risks associated with vaping. MO has been down this road many times with cigarettes,” I wrote in September.
As credit analysts and professional investors second guess the value of Juul Labs, it’s clear that Atria’s investment in the maker of e-cigarettes isn’t nearly as much of a slam dunk as it thought it was when it closed the deal last December.
Meanwhile, Cronos stock has also faced a headwind due to the fact that it’s focusing its growth on vaping. CRON stock lost 18% of its value in September as investors questioned how much vaping-related sales would grow under the current regulatory haze.
While I believe that regulators will ultimately get this entire health scare sorted and both Juul and Cronos will go back to running their businesses, I can’t help but think how relieved Altria’s management must be that they made the $1.8 billion investment in Cronos in exchange for 45% of its stock.
The Upside to Altria Stock
At the end of December 2018, not too long after Altria closed its investments on both Juul and Cronos, I wrote a piece entitled “Compared to Juul Labs, Altria Got a Steal in Cronos Stock.” Eight months later, if anything, Altria’s investment in Cronos is looking like a lifesaver.
“While Cronos doesn’t have anywhere near $1.5 billion in revenue — the cannabis company had just CAD$3.8 million in its most recent quarter — it gives Altria a platform for growth in a market that’s destined to be much bigger on a global basis than e-cigs could ever hope to be,” I wrote in December of last year.
Forget the fact that Cronos is focusing its growth on vaping for a moment and consider that Altria gained control of a large player in the cannabis game for just $2.9 billion, including the $1.1 billion to exercise the additional 10% that takes its stake to 55%. When Altria acquired its 45% stake, Cronos had a market cap of approximately $4 billion. Today, it’s around $2.9 billion, which means Altria’s sitting on a $500 million unrealized loss from Cronos.
That could turn out to be a bargain because Cronos is sitting on more than a $1 billion of Altria’s cash. If the vaping crisis goes on for months or years, Cronos has enough cash to ride out the vaping scare while producing and selling a decent amount of dried flower.
It might not be a top-tier cannabis producer, but it’s got access to every market in Canada. And with Altria’s help, it will flourish south of the border once federal legalization happens. In addition, if cannabis stocks suffer under the weight of the vaping scandal, Cronos could also pick up some quality assets on the cheap.
The Bottom Line on MO Stock
The Altria stock price is down 12% year to date, including dividends, and 31% over the past year.
The Juul controversy is not going to help it get out of the funk it’s in. Nor, I’m afraid, will its investment in Cronos. But fear not, once the health issues get solved and officials know what’s causing all the illnesses, both Juul and Cronos can adjust their businesses accordingly.
In the meantime, Altria can focus on the 2020 rollout of IQOS across the U.S.
MO stock might be down, but I don’t think it’s out. Not by a long shot.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.