Tobacco giant Altria (MO) made a massive investment in electronic cigarette maker Juul Labs this morning.
This deal had been reported for many weeks, so it did not come as much of a surprise, but the numbers are fairly staggering.
Altria is investing $12.8 billion at a $38 billion valuation. Juul Labs raised $650 million at a $15 billion valuation just five months ago.
Juul has rapidly gained a 30% market share of the US e-vapor market. Altria will have a 35% stake and JUUL will remain independent and retain complete operational autonomy.
Clearly, Altria views the crack down from the FDA in September, targeting teen use of vaping, especially Juul Labs, as noise.
Altria also reaffirmed fiscal 2018 adjusted EPS guidance of $3.95-4.03 and its long-term goal to grow EPS 7-9% annually.
The company warned that earnings growth would miss its +7-9% EPS growth target in 2019 as a result of the debt incurred in connection with its investments in JUUL and Cronos Group, a cannabinoid company Altria poured $1.8 billion in two weeks ago.
Altria also announced a cost reduction program to eliminate $500-600 million in annualized expenses by the end of 2019.
Altria's recent investments appear to be a defensive in nature. The stock peaked in the summer of 2017 and has been hampered by lower cigarette volumes ever since. It was crucial for Altria to be a leader in the vaping market as more people either quit smoking or switch to e-cigs.
Altria has a $94 billion valuation and trades at ~12x EPS, a slight discount to Philip Morris (PM) but a premium to British American Tobacco (BTI).