THE HEDGEYE EDGE
Below is a note written by Consumer Staples analyst Howard Penney:
I have come full circle!
25 years ago, in the Spring of 1993, I was a tobacco analyst at Morgan Stanley, when Philip Morris, the maker of Marlboro cigarettes, announced a cut in the price of Marlboros to stem the brands market share losses to generic cigarettes. MO dropped 26% that day, wiping $10 billion off its market cap, and the company’s change in strategy altered the value equation for many premium brands. Marlboro Friday was a memorable event in my career, and I believe another Friday from late 2018 will prove to be a significant event in the Cannabis industry.
In early December, Altria which is now the maker of Marlboro cigarettes, purchased a 45% equity position in Cronos (CRON) for C$2.4B, our only Best Idea LONG in the Cannabis Industry. Given the events (and certain nostalgia around coming back to my research roots) we added MO the Hedgeye Consumer Staples LONG List.
The shift in strategy for Altria to focus on the emerging Cannabis industry will have significant long-term implications for the company as they look to capitalize on the growth in the Cannabis industry. Like Altria, we believe that CRON is one of the best positioned companies in the Cannabis space.
While MO is not without controversy, we like the LONG set-up for the stock:
- Since 2000, the stock has had three down years on an absolute basis 2002, 2008 and 2018. In 2018, the stock was down 30%, underperforming the S&P by 23%
- The company continues to shift priorities to focus on the emerging segments of the industry, including cannabis. MO officially announced recently that it will invest $12.8B for a 35% stake in JUUL Labs (values the company at $38B), a U.S. producer of e-vapor products. The driving force for the acquisition as MO put it, is to “accelerate harm reduction and drive growth.” We think the “drive growth” portion of that statement has a lot to do with cannabis! In the release MO went on to say: “Building on Altria's previously announced growth investment in Cronos Group Inc. (Cronos Group), Altria believes its investment in JUUL strengthens its financial profile and enhances future growth prospects.
- The proposed FDA ban on Menthol cigarettes is now discounted by the market. Over the years, management’s track record of delivering strong results despite a challenging regulatory environment is one of the hallmark attributes of MO.