Will Altria Sell Marijuana and Forget About E-Cigarettes?

Shares of Altria (NYSE: MO) jumped nearly 7% on Sept. 12 after executive VP and general counsel Murray Garnick discussed the cannabis market at the Barclays 2018 Consumer Staples Conference. Garnich stated that Altria was "exploring options" and "evaluating market opportunities."

That news seemed to offset a negative development regarding Altria's e-cig business. The FDA issued a warning to tobacco companies, stating that it would pull their e-cigarettes from retail shelves if they didn't make more changes to curb teen use. The agency also issued 1,300 warning letters to retailers of the top five e-cig brands in the US -- Vuse, Blu, Juul, MarkTen XL, and Logic -- which account for 97% of the domestic market. It also fined 131 retailers for selling e-cigarettes to teens.

Altria owns the MarkTen e-cig brand. British American Tobacco (NYSE: BTI) owns Vuse, Japan Tobacco (NASDAQOTH: JAPAF) owns Logic, and Imperial Brands (LSE: IMB) owns Blu. Juul is produced by a start-up. Yet shares of all these tobacco stocks rallied after Altria's comments, suggesting that investors believe that marijuana could help tobacco makers diversify away from traditional cigarettes and e-cigarettes.

Would Altria really sell marijuana?

It seems like a big leap for a major tobacco seller to start selling cannabis, but some tobacco makers are already dipping their toes in the market. Earlier this year, tobacco company Alliance One International disclosed its investments in two Canadian medical marijuana companies -- Island Garden and Goldleaf Pharm. An Imperial Brands subsidiary also recently co-invested in the medical marijuana company Oxford Cannabinoid Technologies (OCT).

These investments don't mean that tobacco makers will start rolling joints at their factories. However, analysts repeatedly point out that cannabis sales could offset the ongoing declines in traditional cigarettes.

The US adult smoking rate has declined from 20.9% in 2005 to 15.5% in 2016, and new proposed FDA regulations (for lowering nicotine levels in cigarettes and restricting the use of flavored cigarettes, cigars, and e-cigarettes) could exacerbate the decline. Altria usually offsets its cigarette shipment declines with price hikes and cost cutting measures, but that treadmill strategy won't work forever.

Meanwhile, a study from Yahoo News and Marist College last year found that over half of Americans have tried marijuana, and 22% are current users (meaning they smoked marijuana at least once or twice over the past year). Smoking marijuana was once considered a crime, yet 30 states have now legalized its use, with recreational use now legal in nine states and Washington, DC.

The FDA doesn't seem eager to halt that process, and its website encourages further research into medical uses. In fact, the government might even encourage the commercial production of marijuana to clear out the black market, introduce official safety standards, and impose new excise taxes.

Would Altria abandon e-cigarettes?

Altria and other tobacco makers once claimed that selling e-cigarettes would reduce their dependence on traditional cigarette sales. However, sales of Altria's e-cigarette brands generate a tiny percentage of the company's total revenues.

Altria clumps its e-cig brands with its Verve nicotine "discs" and iQOS tobacco heating devices in its "all other" unit, which generated just 0.3% of its sales in the first half of 2018. MarkTen XL remains an industry underdog with just 7% of the e-cig market, according to Wells Fargo Securities analyst Bonnie Herzog, compared to market leader Juul's 60% share.

Expecting that tiny business to become a pillar of growth seems like a pipe dream, especially since the FDA seems intent on killing the e-cig market. Altria probably won't abandon the e-cigarette market, but it's probably looking for other potential growth markets -- like marijuana.

But let's not get ahead of ourselves

Altria might be considering "options" for the cannabis market, but this hardly means that it plans to mass produce marijuana cigarettes anytime soon. Investors should also note that Altria's execs only mentioned those "options" after Barclays analyst Gaurav Jain prodded them on the issue.

For now, investors should realize that neither the cannabis nor e-cig headlines will have much of an impact on Altria's growth. Instead, they should focus on the FDA's proposals for lower-nicotine cigarettes -- which could deal serious damage to its core business.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Imperial Brands. The Motley Fool has a disclosure policy.