Tobacco company Altria Group Inc. (MO, Financial) disclosed a loss in its fourth-quarter and full-year 2019 earnings on Thursday morning, taking a $4.1 billion hit as a result of its investment in e-cigarette maker Juul.
The Richmond, Virginia-based manufacturer of Marlboro cigarettes said the impairment charge was due to the mounting litigation and public scrutiny related to a surge in teen vaping and a mysterious vaping illness that has caused 60 deaths in the U.S. and hospitalized 2,711 people as of Jan. 21. While not tied directly to Juul, the illnesses have heightened the public’s concern about the health effects of vaping in general.
Altria reported that Juul has seen an 80% increase in the number of legal cases pending against it since the end of October. In addition, several markets have banned sales of its flavored pods. The company said it expects the number of cases will continue to grow.
For the quarter, Altria swung to a loss of $1.81 billion, or $1 per share, from net income of $1.25 billion, or 66 cents per share, a year ago. The company posted adjusted earnings of $1.02 per share, which were in line with Refinitiv’s estimates. Revenue grew 0.3% from the prior-year quarter to $4.8 billion, but fell short of expectations of $4.88 billion.
Altria recorded adjusted earnings of $4.22 per share for the full year on $19.7 billion in sales.
In a statement, CEO Howard Willard lauded the company’s results for the year, saying the core tobacco business “delivered outstanding performance.”
“Despite the unexpected challenges related to our investment in JUUL, which led to impairment charges and reported losses, we made significant progress advancing and building our noncombustible business platform with the launch of IQOS and completion of the on! transaction,” he added. “We enter 2020 with continued focus on harm reduction. We believe Altria’s enhanced business platform best positions us to succeed under various future category scenarios.”
For the year ahead, the company is anticipating adjusted earnings of $4.39 to $4.51 per share. Altria also lowered its compounded annual adjusted earnings per share growth rate target from between 5% and 8% to 4% to 7% for 2020 through 2022.
Juul investment
As smoking rates have been declining in the U.S. and volumes are projected to fall between 4% and 6% in 2020, Altria is looking to expand beyond traditional tobacco products. To jumpstart this initiative, it invested $12.8 billion in Juul in December 2018, acquiring a 35% stake.
Then, after receiving the Food and Drug Administration’s approval last April, it released its own alternative to cigarettes, the Iqos Heated Tobacco device, in October. Rather than burning tobacco, the device heats it, giving users the same effect with less exposure to toxins. In addition, the FDA set strict marketing guidelines to ensure only adult smokers use the device. Altria reported that the product has now been rolled out to 500 retail stores in Atlanta and its hometown of Richmond, Virgina.
As a result of the charges related to its investment in Juul, Altria said the value of its stake has declined to $4.2 billion as of Dec. 31. To reflect the new value of the investment, the two companies revealed revised terms for the agreement. While Altria will continue to help Juul with regulatory procedures, it will cease all other services that were part of the original contract by the end of March.
Upon being cleared of antitrust concerns by the Federal Trade Commission, Juul has also agreed to restructure its board to include two Altria-nominated directors, three independent directors, Juul’s CEO and three additional directors selected by its other shareholders.
Most notably, Altria has the option of being released from its non-compete agreement if Juul is prohibited by federal law from selling e-cigarette products in the U.S. for at least a year, or if the tobacco giant’s stake in the company drops below 10% in value of its initial investment.
“This agreement is a continuation of the reset initiated by JUUL’s leadership team,” Willard said. “We look forward to working with the company under this structure to support JUUL’s commitment to working with regulators and submitting the best possible PMTA.”
According to the GuruFocus Industry Overview page, with a weight of 40%, Altria is the second-largest tobacco company in the U.S. behind Philip Morris Internatonal Inc. (PM, Financial).
Stock performance and guru ownership
With a market cap of $93.61 billion, shares of Altria were trading 5.07% lower at $47.57 on Thursday morning. Having posted a small gain in 2019, GuruFocus estimates the stock has risen nearly 0.5% year to date.
Gurus with large positions in Altria include Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Tom Russo (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Disclosure: No positions.
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