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Altria, Philip Morris Stock Faces Rising Threat From Vaping

Altria, Philip Morris Stock Faces Rising Threat From Vaping

E-cigarettes are eating into the market for traditional products at a fast clip, and that’s bad news for big tobacco, says Cowen & Co.

Where we were: Vaping made its mark on 2018, but going forward, e-cigarettes look poised to have an even bigger impact on combustible-cigarette volumes.

Where we’re headed: E-cigarettes will see rising growth, and that complicates the outlook for traditional tobacco companies like Altria Group(MO) and Philip Morris International (PM), says Cowen.

Many investors are happy to put 2018 behind them, perhaps none more so than big tobacco shareholders, as Altria and Philip Morris ended the year well in the red, underperforming the consumer staples sector in general.

There were a number of headwinds for the tobacco industry, from easing sales volumes to regulatory threats to menthol flavoring, but of course the biggest story is vaping. Despite the Food and Drug Administration trying to crack down on the industry, especially in teens, e-cigarettes remain a growing market, and one that’s wooing both current smokers and new users.

Tobacco companies themselves are well aware of this: Altria bought a pricey stake in Juul Labs, and Philip Morris’s chief financial officer told Barron’s that its iQOS alternative tobacco device could lead the way into a future without traditional cigarettes.

That may be so, but the more immediate future looks cloudier, warns Cowen & Co.’s Vivien Azer. While she expects that e-cigarettes will be, at most, a one percentage-point drag on the cigarette industry’s sales volumes in the U.S. for 2018, that figure is expected to jump in the years to come. She predicts that “the meaningfully higher rates of e-cigarette use among younger consumers will have an increasingly negative impact on industry volumes, as the consumer waterfall effect takes hold (e.g., older smokers will exit the cigarette category, but will be replaced by vapor consumers).”

Philip Morris declined to comment. Altria had no immediate comment.

All told, Azer believes that in the period of 2018 to 2025, cigarette sales volumes will fall at an 8% compound annual rate, while e-cigarette use expands “dramatically,” generating as much as $26.8 billion in retail sales by 2025, up from $6.6 billion last year.

That’s unwelcome news for traditional tobacco giants. It led Azer to downgrade Altria from Outperform to Market Perform Monday, and to reiterate a Neutral stance on Philip Morris.

For Altria, she lowered her price target to $53 from $74, writing that while she is encouraged by the company’s investment in Juul, earnings per share could be depressed for the next two years, given the high price Altria paid for the stake. Azer lowered her price target on Philip Morris as well, to $69 from $88, citing a slowdown for iQOS in Japan, and decelerating use in Europe, along with heightened competition.

She also cut her ratings on the overseas shares of British American Tobacco(BATS.UK) and Imperial Brands (IMB.UK) to Market Perform, citing similar concerns about the effect of vaping. That leaves Turning Point Brands (TPB) as her only Outperform-rated stock in the group.

Altria was down 3.4% to $48.61 on Monday morning, while Philip Morris was 2.6% lower to $67.72. The Dow Jones Industrial Average was near the break-even line.

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