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Altria downgraded as analyst questions Philip Morris merger and further scrutiny of Juul's vaping ads

Key Points
  • "We have less confidence in Altria's outlook following company discussions between Altria and [Philip Morris]," Piper Jaffray analyst Michael Lavery said in a note to investors.Piper Jaffray also focused on Altria's 35% stake in vaping company Juul.
  • Juul is under fire from the FDA for allegedly illegally marketing its nicotine pods as a safer alternative to cigarettes.
Marcus Wolf of German e-cigarette manufacturer Eazzi tests a new vaping cigarette at the Eazzi headquarters in Gelnhausen, Germany, January 29, 2019.
Kai Pfaffenbach | Reuters

Piper Jaffray lowered its rating of tobacco company Altria to neutral from overweight due to rising concern about its potential merger with Philip Morris, as well as the increasing regulatory scrutiny of JUUL and vaping products in general.

"We have less confidence in Altria's outlook following company discussions between Altria and [Philip Morris]," Piper Jaffray analyst Michael Lavery said in a note to investors Monday. "We do not know the terms of a deal, if one happens, but any interest in a deal without a premium could suggest more stress on the underlying fundamentals and management's outlook for the future than we had appreciated."

Additionally, as Altria owns a 35% stake in Juul, the analyst noted that Altria's potential benefit from the vaping company is at risk. The Food and Drug Administration (FDA) on Monday slammed Juul for marketing its nicotine pods as a safer alternative to cigarettes. The FDA warned that it may fine or even seize Juul's products if the company does not correct its advertising.

"Vapor products are under growing scrutiny in the US, and there may be more risk than we had expected to FDA approval of JUUL," Lavery said.

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Lavery broke down his firm's view of what will happen if Juul is not approved by the FDA.

"We expect cigarette volume declines could potentially moderate and return to more typical historical levels, and iQOS is likely to benefit," Lavery said. "However, before any potential benefit would be clear, we expect Altria's stock would first trade off on negative FDA news, especially given the $13B it spent on its JUUL stake."

Altria's stock was largely unchanged in premarket trading from its previous close of $44.04 a share. Piper Jaffray lowered its price target on shares of Altria to $49 from $64.

– CNBC's Michael Bloom contributed to this report.