Final Nail in the Coffin for Altria’s Juul Investment, but FDA Ban Has Little Impact on Our Valuation

The U.S. Food and Drug Administration may be about to drive the final nail into the coffin of Altria’s (MO) investment in Juul Labs, after The Wall Street Journal reported on June 22 that the U.S. regulator is likely to order the removal of all remaining Juul products from the U.S. market. We have long been skeptics of Juul’s outlook, and our $52 per share fair value estimate of Altria assumes Juul would barely be profitable throughout our forecast period. Therefore, the removal of Juul’s contribution to Altria’s earnings, which Altria reports as equity income, has no impact on our valuation. Although the 9% decline in the share price following the report seems like an overreaction, it probably reflects the deflation of optimistic assumptions around Juul and surprise at the blanket ban, as well as a reminder of the regulatory risk that accompanies investments in the tobacco sector. Our capital allocation rating of Altria remains Poor.

When Altria acquired a 35% stake in Juul for $12.8 billion in late 2018, management justified the valuation with highly optimistic cash flow assumptions that assumed generous commercial opportunities but overlooked the high-probability risk of regulatory intervention in the e-cigarette category. When the FDA subsequently intervened to limit fruity and sweet flavored nicotine liquids, sales of Juul plummeted and multiple write-downs followed. The carrying value of Altria’s investment at the end of the first quarter was just $1.7 billion, and we now expect that to be written off in full if the FDA proceeds with a ban. An outright ban of all Juul products is a surprise, even to us, and is a clear indication of a more hawkish FDA. We had expected Juul to be allowed approval for a portfolio limited to tobacco flavored liquids. Now it seems the only opportunity for Juul to create value may be in international markets, but we expect other regulators to take a similar stance to the FDA in limiting the marketing of e-cigarettes to minors.