Why Did Altria Take A Hit Of $4.5 Billion On Its Bottom Line?

by Trefis Team
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Altria Group, Inc.
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Altria (NYSE: MO) made a substantial loss of $2.6 billion in Q3 2019 against a net profit of $2 billion in Q2 2019 and $1.9 billion in Q3 2018. This marks a sequential decline of a whopping 230% in net income during the third quarter compared to Q2 2019. The primary reason for such a drastic fall in profits is the $4.5 billion impairment charge recorded by the company with respect to a lower value of its investment in JUUL. Such a significant impairment charge is likely to have an adverse impact on the full year’s profits as well.

To understand changes in revenue and expenses for Altria during the last quarter, refer to the Trefis analysis – Why Altria made substantial losses in Q3 2019 versus a profit in Q2 2019?

Change in Net Income

  • Net income dropped from $2 billion in Q2 2019 to a net loss of $2.6 billion in Q3 2019, marking a decline of $4.6 billion in a quarter
  • This decrease in profitability can be attributed to $4.8 billion increase in total expenses, partially offset by $0.2 billion increase in total revenues

Revenue Growth

  • Around 83% of the $237 million increase in total revenue during Q3 2019 was driven by smokeable tobacco products.
  • Altria saw an increase in the number of cigarettes sold (due to favorable trade inventory movement) and price per cigarette, while revenue growth in the smokeless tobacco category remained subdued, in line with the broader industry trend.

To understand different operating divisions of the company and how each division is expected to grow, refer to the Trefis analysis- Altria Revenues: How Does Altria Make Money?

Rise in Expenses

  • Total expenses increased by $4.8 billion, out of which $4.5 billion was driven by impairment of investment in JUUL
  • Impairment cost which was nil in Q2 2019, jumped to $4.5 billion in the following quarter, due to reduction in the value of Altria’s investment in JUUL.
  • Altria had invested about $12.8 billion for a 35% stake in JUUL Labs, valuing the e-vapor giant, which has a market share of over 70% in the US, at close to $38 billion. A majority of analysts in the market believed that Altria had overvalued JUUL.
  • Currently the e-cigarette players are facing a lot of regulatory uncertainty as a few states such as New York and Michigan have already banned flavored e-cigarettes, after reports of deaths due to vaping.
  • Post Altria’s stake, JUUL which was valued at $38 billion last year, is now pegged at about $24 billion, as future sales growth no longer looks strong. Juul is also projected to cut as many as 600 jobs by the end of the year in response to the market’s doubts.
  • Altria now believes that Juul may sustain further hits to its valuation as more states look to ban e-cigarette flavors that appeal to youth and which comprise about 80 percent of domestic vaping sales.
  • Thus, due to an uncertain regulatory climate and lower future growth expectations, Altria wrote down its investment in JUUL by 35%, or by $4.5 billion.

To understand which other major expense items moved during the last quarter, refer to the Trefis analysis– Why Altria made substantial losses in Q3 2019 versus a profit in Q2 2019?

 

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