Altria investors are very excited by the prospects for NJOY, but the tobacco company is nowhere near replacing its core business.
The stock of Altria (MO -1.07%) has risen more than 20% over the past year as investor sentiment around cigarette makers has improved across the board. The big story for all the major companies in the space has been the growth of cigarette alternatives, like vaping products and pouches.
For Altria, after a failed investment in Juul, the hot story is its purchase of NJOY. But don’t get too excited — here’s why.
Altria fails and fails again
Before getting into NJOY, it is worth looking a little further back. The ongoing decline in cigarette demand is not new, so Altria has known for years that it needs to find a replacement product if it hopes to grow over the long term. Bridging the gap between cigarettes and some hoped-for alternative have been price increases, which have largely countered the volume declines.
Image source: Getty Images.
To put a number on the decline rate, second-quarter 2024 cigarette volume fell 13% year over year for Altria. That’s a huge and worrying figure and one that shouldn’t be overlooked. A consumer staples company with that kind of volume decline would normally be viewed quite negatively.
Altria hasn’t ignored the volume decline, but it hasn’t distinguished itself in dealing with it, either. It bought into vape maker Juul and a marijuana grower. Both investments fell flat and resulted in billions of dollars in write-offs.
Altria also spun off its foreign operations as Philip Morris Internationala company that is now entering the U.S. market with noncombustible products like pouches. Essentially, Altria created a competitor. These are all material strategic missteps.
Altria buys NJOY and investors rejoice
Altria’s latest attempt to find a new product was its purchase of NJOY, another vape maker. To be fair, NJOY was further along in the development of its product than Juul. That suggests that the potential for NJOY is better defined. And so far, Altria is doing a pretty good job with its new product. Management has been happy to tell you about it.
In the second quarter, the company’s earnings release was filled with NJOY information. In fact, it was the first major topic discussed, and for good reason. NJOY consumables shipment volume rose 14.7% sequentially, device shipment volume increased 80% sequentially, and retail share in the United States increased 1.3 points sequentially to 5.5%.
To give credit where it’s due, Altria is executing well with NJOY. And in a way that it failed to do with its previous efforts at expansion.
Still, there’s a problem here that investors shouldn’t overlook. NJOY currently falls into Altria’s “all other” segment. It isn’t actually broken out, so it is hard to get a true read on what’s going on beyond the information management is releasing. That’s a problem since NJOY is supposed to help save the company from its declining cigarette business.
But the bigger issue here is that the “all other” category had revenue of just $22 million in the second quarter. Revenue in the smokeable products division was $10.4 billion. Even the company’s oral products group dwarfs “all other” with revenue of $1.3 billion.
There are two important takeaways here. First, NJOY is working off a very small base, so the growth numbers look huge. Second, NJOY is still just a rounding error for Altria given the relative size of the rest of its business, particularly cigarettes.
This good news has to be put into perspective
It is great that Altria is having material success with its investment in NJOY. But even with the rapid growth of that business, it is still just a very small part of overall operations. It will be a long time before NJOY can offset the declines in the cigarette business, if that’s even possible, let alone help the company expand.
Altria remains a company with a deeply troubled business and is only appropriate for the most aggressive investors. That remains true despite the recent stock price increase and the hefty 7.5% dividend yield.
Long-term dividend investors should be particularly careful with Altria given the ongoing and rapid declines in its most important business. Before buying it, ask yourself if you would buy a company like Coca-cola if demand for that company’s namesake product had fallen 13% year over year, with more declines on the horizon and a string of declines in the rearview mirror. The most likely answer is no.
