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Shares of tobacco giant Altria Group Inc. were slammed Thursday, after the company swung to a big loss for the fourth quarter, weighed down by a $4.1 billion impairment charge on its investment in e-cigarette maker Juul Labs.
Adding to the gloom, the company MO, -5.09% reduced medium-term guidance it had already revised downward with third-quarter results in October and pulled medium-term cigarette volume guidance.
“Has the cigarette business really become so hard to forecast that the market leader feels uncomfortable predicting volume growth on a three-year view?,” asked Bernstein analysts in a note to clients.
As to whether the market will be able to look past the negative headlines to see that “underlying” results look quite robust, they added: “We’re not confident.” The stock was last down 5.2%.
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Altria posted a net loss of $1.809 billion, or $1.00 a share, for the quarter, which comes after income of $1.250 billion, or 66 cents a share, in the year-earlier period. Stripping out the Juul charge, adjusted per-share earnings came to $1.02, matching the FactSet consensus.
Revenue net of excise taxes came to $4.802 billion, up 0.3% from a year ago, but below the $4.883 billion FactSet consensus.
See: Cannabis experts are hoping 2020 will be the year that New York finally legalizes weed
“I’m highly disappointed in the financial performance of the Juul investment,” Chief Executive Howard Willard told analysts and reporters on an earnings call, according to a FactSet transcript.
Altria invested $12.8 billion to purchase a 35% stake in Juul in December of 2018, valuing Juul at $38 billion. It now values the company at about $12 billion, after writing down the value of its stake by $4.5 billion in October.
The investment itself remains in regulatory limbo as antitrust regulators investigate the deal. Juul has become the subject of probes by health officials who have criticized it for marketing to teens and after a vaping illness led to state bans on vapes. The illness has been found to be tied to black market vaping devices containing cannabis and vitamin E acetate, but regulators have still banned certain e-cigarette flavors and warned the public to be careful in using them.
See: Raising the legal tobacco age from 18 to 21 could save 50,000 lives
Altria said it has not revised the terms of the investment to include provisions that will push underage use prevention. The company will no longer provide Juul with marketing and retail distribution and will instead focus on helping it deal with regulators, including the Food and Drug Administration.
Juul will add two Altria directors to its board as soon as it receives antitrust clearance for the investment, along with three independent directors, the Juul CEO and three directors designated by Juul shareholders.
Altria also has the option to be released from non-compete clauses if Juul is banned by federal law from selling e-vapor products in the U.S. for at least a year, or if the carrying value of its Juul investment is not more than 10% of its initial carrying value of $12.8 billion.
Altria expects full-year adjusted EPS of $4.39 to $4.51, wrapping around the FactSet consensus of $4.45. The company expects total domestic cigarette industry adjusted volume to fall 4% to 6% in 2020 from the year-earlier period, including the impact of federal legislation that raised the minimum age to purchase tobacco products to 21.
“Altria expects continued volatility across tobacco categories and will no longer provide a multi-year forecast for U.S. cigarette volume declines,” said the statement.
See: Altria downgraded to sell on concerns about headwind posed by new minimum age for buying tobacco
On a brighter note, Bernstein analysts note that margins were strong in the quarter, up more than 500 basis points to 54.8%, thanks to pricing moves that may be unsustainable, they wrote. Beyond that, the report “starts getting very messy,” they wrote.
The company said it will no longer account for the Juul stake using the equity accounting methodology but instead will use fair value methodology.
Read: Juul moves its new CFO to take charge of restructuring
“Frankly, we think this is very strange,” Bernstein analysts wrote. “Without further explanation from the company, to us this likely suggests that given the recent turbulence in the e-vapor market (and at Juul specifically), it is probably operating with big losses that Altria does not want to bring into its own P&L.”
On the earnings call, Altria CEO Willard acknowledged that expectation: “We don’t have any expectations that we would receive dividends over the next three years.”
Bernstein rates the stock as market perform with a target price of $56, that is about 17% above its current price.
Shares have gained 4% in the last 12 months, while the S&P 500 SPX, -0.43% has gained 22%.
See also: E-cigarettes may actually be worse for your heart than regular cigarettes
