Text size

Altria Group stock has badly trailed the market in 2019, but Wells Fargo argues that the rollout of the new iQOS device will give the tobacco giant an edge.

The back story. Altria (ticker: MO) has fallen nearly 16% year to date, while the S&P 500 has climbed nearly 18% in the same time. The shares have struggled throughout 2019, but took a real beating in August, when the company was in talks with Philip Morris International (PM) about a potential merger.Investors in both companies were skeptical (even if some analysts liked the idea).

While news that the negotiations had broken down helped both stocks, Altria has continued to languish. Investors are worried about the regulatory and legal risks of vaping—and Altria has only increased its ties to Juul Labs, in which it holds a 35% stake, since the dissolution of the M&A discussions.

What’s new. One potential beneficiary of the scary health headlines about vaping is Philip Morris’s heat-not-burn device, iQOS. It isn’t a vaping device, and it has more appeal to current smokers than flavored e-cigarettes, the thinking goes. Altria is handling the rollout of iQOS in the U.S., and last week launched the product in Atlanta stores.

Wells Fargo analyst Bonnie Herzog reiterated an Outperform rating and $65 price target on Altria Monday, writing that “iQOS holds a distinct competitive advantage in the U.S.” It is the only reduced-risk product that the Food and Drug Administration has cleared to sell mint and menthol flavors.

It’s a key distinction given that these are key to converting smokers, and sales of flavored e-cigarettes may be blocked by regulators. “As such, we see the removal of e-cig flavors only widening iQOS’s competitive moat,” Herzog said,

Looking ahead. Given that it took years for iQOS to get FDA approval, Herzog believes other vaping companies face a long fight for agency approval for their own flavorings. She applauded the “very disciplined approach” Altria is taking on the Atlanta rollout of iQOS, targeting communities across the income spectrum and stressing compliance as the company “strives to strike the right balance as both a responsible manufacturer and reduced risk produce trend setter.”

She isn’t the only analyst who thinks Altria needs iQOS now more than ever.

Altria was up 0.7% to $41.92 in morning trading.

Write to Teresa Rivas at teresa.rivas@barrons.com