Is Altria’s Growth Sustainable?

The smoking rate has been on the decline in the US since the mid 1960s, as a result of tax hikes, a ban on tobacco marketing and smoking in public places, and growing awareness among the consumers. The smoking rate has come down from 21% in 2005 to under 17% today, and is estimated to decline at a rate of 3% per annum till 2040. The US, from where Altria generates all of its revenue, has had one of the steepest declines in the prevalence of smoking. Moreover, a number of states in the US are considering raising the cigarette taxes in the coming months. This will put increasing pressure on companies, such as Altria (NYSE:MO), to raise the prices of their tobacco products. Such initiatives will further pound the cigarette volumes of tobacco companies. In the face of such issues, we highlight some factors which we feel will ensure Altria’s growth can be sustainable in the long term.

1. The iQOS Opportunity

The new smoking technology developed by Philip Morris, which heats tobacco, instead of burning it, can be a game changer for the industry. The company has spent over $2 billion on R&D for developing products as an alternative to cigarettes. Altria has a partnership with Philip Morris, and hence, will get exclusive rights to sell the iQOS system in the US. The prospects of this technology look very bright, as evidenced by the recent second quarter earnings results of Philip Morris. In Japan, the only country where iQOS has been rolled out nationally, the HeatSticks market share has increased steadily to reach 2.7% for the last week of June, and 2.2% for the whole of the second quarter. This figure is more than double the share in the first quarter, with the product witnessing a volume growth of 20% on a monthly basis. In Tokyo, the share captured is even higher, at 5%. Another impressive statistic is that 70% of iQOS purchasers have either fully, or predominantly, converted to it. When Altria starts distributing them in the US, the product should have a higher uptake as a result of being more recognizable with the Marlboro brand. This faster pickup will generate high growth for the company in the future.

2. Stake In SABMiller

Altria has an approximately 27% economic interest in SABMiller, which allows it to participate in the ~$36 billion global profit pool. Equity earnings from this stake have grown from $600 million in 2010, to a little over $1 billion in 2015, a compound annual growth rate of 10.9%. Subject to regulatory clearance, the takeover of SABMiller by AB InBev should give Altria a 10.5% stake in the combined entity. This enables the company to benefit from diverse income streams. The two beer companies are highly exposed to the fast growing markets of Africa, Latin America, and Asia, resulting in higher earnings and dividend growth prospects. For example, SABMiller has a 34% market share in the African continent, where sales are expected to witness a growth of 44% between 2014 and 2025, three times the expected global growth rate. Such factors will indirectly benefit Altria, due to its stake in the business.

3. Dominant Position In the US

Altria’s Marlboro brand is the number one brand in the US, and has a 44% share in the country’s tobacco market. The addictive nature of cigarettes not only builds a high level of brand loyalty among customers, but it also makes the products less price elastic. Given the massive share that Altria has in the market, its Marlboro cigarettes can be considered even less vulnerable to price hikes. This ensures that the revenue of the company can continue to increase, despite the declining volume of cigarettes sold.

Have more questions on Altria? Have a look at the links below:

• What Can Lead To A 10% Downside In Altria’s Valuation In The Next Few Years?
• Which Is A Better Dividend Bet – Altria Or Philip Morris?
• Altria’s Stock Still Smoking Hot After The Brexit
• What Will Be Altria’s Revenue And EBITDA Breakdown In 2016?
• What Are Altria’s Strategies For Long-Term Growth?
• How Will Altria Perform In 2016?
• How Will The New FDA Ruling On E-Cigarettes Help Altria?
• What Is The State Of The Vapor Market In The U.S.?
• How Did The Different Segments Of Altria Perform In Q1 2016?
• Impressive Growth In The Smokeable Products Segment Helps Altria Beat Estimates
• How Will Altria Perform In Q1 2016?
• What Are Altria’s Strengths Driving Long-Term Growth?
• What Are Some Obstacles To Altria’s Long-Term Growth?
• How Will Altria’s Revenue And EBITDA Change In The Next 3 Years?
• How Has Altria’s Revenue And EBITDA Composition Changed In The Last 5 Years?
• Altria: Year 2015 In Review
• How Has Altria’s Shipment Volume, By Brand, Changed Over The Past 3 Years?
• How Has Altria’s Retail Share In Smokable Products And Smokeless Products Changed Over The Last Year?
• What is Altria’s Revenue And EBITDA Breakdown?
• What is Altria’s Fundamental Value Based On Expected 2016 Results?
• By What Percentage Did Altria’s Revenue & EBITDA Grow In The Last 5 Years?

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