Summary
- MO's investment in JUUL seems like a clever way to deal with declining volumes of cigarette sales.
- Recent developments confirm that the regulatory headache for e-cigarette manufacturers like JUUL, and their investors like MO, is not going away.
- The San Francisco e-cigarette ban is of little concern as is the Vermont e-cigarette tax.
- However a closer deadline for e-cigarette marketing applications could apply pressure to JUUL and hence MO.
- MO's earnings may disappoint again in Q2'19.
Altria Group's (MO) investment in e-cigarette manufacturer Juul Labs (JUUL) represents a potential contingency plan, should the volume of combustible cigarettes sold continue to decline. However the past few weeks have seen JUUL come under heavy fire. This article aims to look at the recent potential threats to the success of JUUL and if they are anything to be worried about. Secondly, I discuss why strong earnings for Phillip Morris International (PM) don't necessarily imply strong earnings for MO.
San Francisco's e-cigarette ban
Late June saw news that San Francisco's Board of Supervisors had unanimously voted to ban the sale of e-cigarettes to those in San Francisco. San Francisco Mayor, London Breed, soon signed the ordinance containing the proposed changes meaning the ban would become effective 30 days from that date and then operative after another six months.
Obviously right now revenues from sales of Juul devices and pods don't appear on the balance sheet at MO. Revenues from sales of MO's cigarettes and other nicotine products do however appear on the balance sheet. Considering the e-cigarette ban, San Francisco's chief economist, Ted Egan, has suggested that the ban wouldn't materially impact the local economy because instead of buying vaping products, money will be spent on cigarettes and other nicotine products. Putting this all together, one could suggest the ban could actually be good news for MO in the short term. In reality, the impact to MO of modestly increased sales in one U.S. city is effectively negligible. Looking at the bigger picture however, were temporary e-cigarette bans like this to occur in a more widespread fashion, it wouldn't necessarily be bad news for MO. Lastly, the specifics of the San Francisco ban also mean that if JUUL's product were approved via the premarket review pathway, it would then become exempt from the ban.
