A TV money expert has highlighted how vaping is destroying the cigarette industry after last week’s drastic drop in shares of key tobacco stocks.
‘Mad Money’ host Jim Cramer has spoken out about the huge shifts within the long-standing cigarette industry after it was “obliterated” on Wall Street.
He went further by urging viewers not to invest in the tobacco market after investors realized it was facing an “existential threat” from its vape competition.
Speaking on his CNBC show, Cramer – a former hedge fund manager – addressed the shock share price drop in Altria, the parent company of Marlboro-makers Philip Morris International, by 16 per cent, which was blamed on rapidly declining cigarette volumes.
Billed as its “worst day” in a decade, Altria also suffered after being downgraded from “buy” to “neutral” on the stock market by Citigroup analyst Adam Spielman following its weak earnings report.
“We saw the market’s sudden recognition that the cigarette industry seems to be in serious trouble, disrupted by the rise of vaping,” the Mad Money host explained on Monday.
“Over the course of three short days, the tobacco stocks were bent, they were spindled and they were mutilated by the realization that electronic cigarettes have become a serious threat to the old-school cigarette makers.”
And the situation for the cigarette industry was likely to get worse, he warned with the rise of popular vaping products like JUUL reporting increased sales.
While the market used to be relatively predictable with cigarette volumes consistently dropping 3 to 4 per cent a year – and the tobacco giants simply increasing prices to make up the shortfall – the explosion of vaping is now a grave threat to the tobacco business.
JUUL is already “beginning to disrupt the U.S. cigarette industry” according to Speilman who said it was one of the reasons for his Altria downgrade and argued it was likely responsible for a 6 per cent drop in cigarette sales.
Juul Labs, meanwhile, which now controls almost half of the e-cigarette market, is boasting year-over-year sales with a growth of nearly 800 percent in 2017.
Cramer continued: “Morality aside — not easily done, but work with me here — this thing is (JUUL is) selling like crazy and it’s really eating into the tobacco industry in a way that other e-cigs never could.
“According to Nielsen, U.S. cigarette shrank by 6 per cent in the first quarter, substantially worse than expected, and Spielman ascribes the difference to Juul.”
Spielman also didn’t see that selling vape-like products was a solution for the tobacco giants either.
Some cigarette makers, including Altria, have introduced JUUL-like products, but the Citi analyst worried they could sacrifice earnings growth by moving into the low-margin vape pen business.
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“While the tobacco companies can get into the vaping business, their own vape pens tend to be money losers,” Cramer explained. “Who would want to swap out of an incredibly profitable business and into one that’s losing money?”
While the headline numbers beat analysts’ estimates, Cramer said “the underlying trends were just plain terrifying,” with total volumes down 2.3 percent and its flagship Marlboro brand down 7 percent overall.
The “Mad Money” host concluded he wouldn’t recommend investing in the tobacco space, adding that he would watch Altria’s earnings report “like a hawk.”
“Bottom line: last week investors realized, practically overnight, that the tobacco industry is facing an existential threat from its vaporizer competitors, led by Juul Labs,” Cramer told his viewers. “And while the group got obliterated last week, I think it could even have more downside.”