MO

Publicly traded companies mentioned herein: Altria Group Inc (MO), British American Tobacco PLC (BATS LN; BTI), Philip Morris International Inc (PM)

Highlights

With growth in e-cigarettes/ vaping and Juuling taking share from combustible cigarettes in the US, the presenter is short Altria Group (MO). He sees the potential for new, sleeker, safer nicotine options to grow to 10% of the market over the next 18 - 24 months, up from the ~3% - 4% he estimates today, and this will most directly impact Altria’s sales as it is a pure play on the US tobacco market (with 50% market share). The model to-date has been somewhat straightforward: given 3% - 4% annual volume declines, as people stop smoking or switch to alternatives, MO takes price to offset the lost volume. The result is a “flattish” revenue trend, but layering in some cost cuts allows the company to generate high single digit EPS growth. While the 5% dividend yield is attractive, and a cost for bears, the downside for the stock could be to $35 if the trend towards safer “smoking” options continues, and the model breaks down. If earnings flatline at $4/share this year, and decline next year, the multiple should contract and the stock could ultimately fall to the $35 - $40 range as market expectations adjust to MO’s new reality.