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Investment Overview for Altria Group, Inc. (NYSE:MO)
WHAT HAS CHANGED?
- Changes in trends and Altria's performance
- Impressive growth in the smokeable products segment helped Altria beat consensus estimates in Q1 2016. The adjusted diluted EPS was $0.72, against an estimate of $0.68, and revenues, net of excise, came in at $4.53 billion, compared to expectations of $4.41 billion.
- Revenues, net of excise, grew 5.3%, benefiting from cost cutting measures and higher pricing, with margins also improving as a result by 170 basis points, to 48.1%. Despite moderate cigarette industry volume declines, Altria managed to increase volumes, due to market share gains and an additional shipping day. Growth in retail share was witnessed in the discount brands, led by L&M.
- Higher net pricing and greater volume helped in the growth of the smokeless products segment. The national expansion of Copenhagen Mint also aided in higher volumes, with the brand being the fastest-growing smokeless brand and the largest, growing its retail share by 1.1 percentage points to 32.4%. In e-vapor, Nu Mark continued to increase the distribution of MarkTen XL, with early marketplace results being encouraging. Altria is also working with Philip Morris on an FDA application for iQOS — a product using the heat-not-burn technology.
- Other factors to watch out for
- In May 2015, the much talked about merger between industry No.2 and No.3, Reynolds American and Lorillard, was given FTC clearance. Apart from forming a more competitive force against Altria, this combination could give Altria's menthol offerings tough competition, with leading brands such as Newport and Camel in their portfolio.
- Apart from this, there is the proposed merger between mega brewers AB InBev and SABMiller. Altria has an ~27% stake in SABMiller, and hence, this merger coming through could have varied implications for Altria's financial standing. AB InBev is in the process of shedding its assets to gain regulatory approval for the deal. In Q3, Altria's management addressed the merger, calling it a "compelling opportunity" and further saying that Altria would continue to "manage that asset for the best interest of Altria's shareholders." During the Q1 2016 earnings call, while re-affirming its full year guidance of an adjusted diluted EPS of $3-$3.05, the company stated that the figure does not account for the impact of the proposed merger.
Altria's Retail Share in Cigarettes: We currently estimate Altria's market share in cigarettes to reach 51.7% by the end of the Trefis forecast period. If however, Altria manages to increase its market share to 56% by 2021 through effective marketing of its new Marlboro premium brand architecture, and consistently increase volumes of its discount brand sales, it would imply a 5% upside to the Trefis price estimate.
Revenue per Smokable Product: We currently estimate revenue per smokable product unit to increase by ~17% over the course of the Trefis forecast period, which would suffice to offset the current cigarettes industry volume decline. However, it is also possible that the annual increase in revenue per cigarette is lower than expected due to lower room for higher pricing. A 1% annual rate of increase would imply a 10% downside to the Trefis price estimate.
Altria Group, Inc. (previously named Philip Morris Companies Inc.) is one the largest tobacco corporations in the world and the parent company of Philip Morris USA, John Middleton Inc., United States Smokeless Tobacco Inc., Philip Morris Capital Corporation, and Chateau Ste. Michelle Wine Estates. The company formerly owned Kraft Foods (KFT) and Philip Morris International (PM), which housed its international tobacco business. In January 2009, Altria Group completed the acquisition of UST Inc., a moist smokeless tobacco manufacturer and owner of the Chateau Ste. Michelle Wine Estates. In addition, Altria has a 27.1% interest in UK based SABMiller, one of the world's largest brewing companies.
The brand portfolios of Altria’s tobacco operating companies include well known names such as Marlboro, Copenhagen, Skoal, and Black & Mild. Ste. Michelle produces and markets premium wines sold under various labels, including Chateau Ste. Michelle and Columbia Crest. It exclusively distributes and markets Antinori, Champagne Nicolas Feuillatte, and Villa Maria Estate products in the United States.
Cigarettes and cigars are the most valuable division with about 67% contribution to Altria's value
Cigarettes and cigars are the most valuable division of Altria Group with about 67% contribution to its stock value. Philip Morris USA occupies more than 50% retail share in the US cigarettes market. It sold more than 127 billion cigarettes and cigars in 2015, with Marlboro being the most popular cigarette brand occupying a giant retail share of 44% by itself. This increased by 0.2 share point in 2015, and the number of cigarettes sold by Philip Morris USA increased to 126 billion.
Growth in smokeless tobacco products
Smokeless products is a high growth niche segment of tobacco products in the US and is projected to grow at an annual rate of around 3% over the next few years. Altria currently occupies more than 55% of the market share in the US in terms of volume of sales with its leading smokeless tobacco brands which include Copenhagen, and Skoal.
Declining tobacco consumption
Volume of tobacco products sales have been declining as a result of growing health consciousness amongst people about the extreme health risks of smoking. Federal and state governments in the U.S. have also been discouraging tobacco consumption through high excise duties and legislative controls like bans on public smoking and strict restrictions on advertising and marketing of tobacco products as well as compulsory health warnings. The volume of cigarette sales is expected to decline by 1-4% each year over the next five years.
High excise duties on tobacco products and anti-tobacco legislation
US federal, state, and local governments, tax tobacco products for both revenue and public health purposes. High excise duties lead to increases in cigarette prices which also discourage cigarette smoking. With federal excise tax (FET) increasing from $0.39 to $1.01 per pack of 20 cigarettes in April 2009, the overall volume sales sharply decreased by 9% in 2009. Such excise taxes are as high as 30% of the net revenues for cigarettes and any further increases in excise taxes will likely lead to a fall in demand.
Governments also resort to anti-tobacco legislation and anti-smoking laws to discourage tobacco and cigarette consumption. Legislation such as those banning smoking in public places lead to a reduction in cigarette sales. Family Smoking Prevention and Tobacco Control Act, 2009 also gave the US Food & Drug Administration (FDA) the authority to regulate the tobacco industry, which may lead to greater restrictions on tobacco products. The FDA can limit what goes into tobacco products. For instance, in 2010 the organization enforced a ban on the use of strawberry, vanilla, chocolate, clove, and other such flavors in cigarettes and required the ingredients to be publicized as well as limited marketing, especially to young people. There is also a risk of ban or restrictions on menthol cigarettes that currently comprise almost 30% of cigarette sales.
Most tobacco and cigarette businesses today follow a Price-Profit First Strategy and enjoy significant room for strong net pricing and margin expansion. Despite declining cigarette sales, revenues and profit margins are maintained through higher pricing.
Risks from litigation
The tobacco industry is highly susceptible to adverse litigation. Apart from the likely enormous damage payments, the negative publicity generated by such large and high profile court cases also hurt tobacco products' demand. Due to its large size and market share, Altria is more susceptible to such litigation risks.
Trefis Forecast Rationale for Smokable Products Volume sold annually in the US
This is the total market size of cigarettes in the US in terms of volume of cigarettes sold per year.
The volume of cigarette sales has been witnessing a gradual decline in the annual sales in the US which fell from 333 billion units in 2008 to 298 billion in 2009 mainly due to a sudden jump in the federal excise taxes (FET) on cigarettes. The number of cigarettes sold in the U.S. were 283 billion in 2010 whereas the corresponding figure dropped 2.5% further to 276 billion in 2011.
It is further expected to fall with a CAGR of -1.5% to -2% to reach 235 billion units by the end of the Trefis forecast period.
Trefis considered the following factors for its forecast
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- Increased availability of lower risk products
- There is a rise in demand for smokeless tobacco products since they are perceived to be less harmful than traditional cigarettes. Moreover, since they are smoke free, they can be consumed in places where cigarette smoking is prohibited. An increased consumption of smokeless tobacco products is lowering the demand for traditional cigarettes.
- Altria has entered into an agreement with Okono, an affiliate of Fertin Pharma, to develop innovative non-combustible nicotine containing products. A portfolio of products with different flavors and variegated pricing will encourage consumers to switch from traditional cigarettes to other alternatives.
- Increasing health consciousness
- The volume of cigarette sales has been declining as a result of growing health consciousness amongst people about the extreme health risks of smoking.
- With the added efforts of associations such as the Campaign for Tobacco-Free Kids and the American Lung Association to educate the public about the harmful effects of tobacco use, volume sales are expected to continue declining.
- High excise duties and legislative controls
- US federal, state and local governments tax tobacco products for both revenue and public health purposes. High excise duties lead to increases in cigarette prices which also discourage cigarette smoking. According to one estimate, a 10.0% raise in the specific tax leads to an approximately 2.2% increase in the average price and a 5% decline in cigarette consumption.
- With the federal excise tax increasing from $0.39 to $1.01 per pack of 20 cigarettes in April 2009, the overall volume sales sharply decreased by 9%. Such excise taxes are as high as 30-40% of net revenues for cigarettes in the US and any further increase in excise tax will likely lead to a fall in demand.
- Governments also resort to anti-tobacco legislation's and and anti-smoking laws to discourage tobacco and cigarettes consumption. Legislation like those banning smoking in public places will lead to a reduction in cigarette sales.
- The Family Smoking Prevention and Tobacco Control Act of 2009 gave the US Food & Drug Administration (FDA) the authority to regulate the tobacco industry. This is expected to lead to greater restrictions on tobacco products. FDA can limit what goes into tobacco products, such as the 2010 ban on the use of strawberry, vanilla, chocolate, clove and other such flavors in cigarettes. Other restrictions include the requirement to publicize and limit marketing, especially to young people.
- Marketing restrictions
- Cigarettes and other tobacco products face strong rules on advertising along with marketing restrictions with compulsory guidelines for health warnings on the packaging. Strong restrictions are also meant to prevent children and adolescents from getting influenced from any public marketing of tobacco products. This will likely lead to a fall in demand.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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