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Investment Overview for Altria Group, Inc. (NYSE:MO)
Altria's Retail Share in Cigarettes: We currently estimate Altria's market share in cigarettes to remain between 49-51% over the course of the Trefis forecast period. If however, Altria manages to increase its market share to 56% by effective marketing of its new Marlboro premium brand architecture and consistently increase volumes of its discount brand sales, it would imply a 10% upside to the Trefis price estimate.
Revenue per Smokable Product: We currently estimate revenue per smokable product unit to increase by 3% 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 0.4% 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 of 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 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 as the most valuable division with over 70% contribution to Altria's value
Cigarettes is the most valuable division of Altria Group with over 71% contribution to its stock value. Philip Morris USA occupies more than 49% retail share in the US cigarettes market. It sold more the 135 billion cigarettes in 2011, with Marlboro being the most popular cigarette brand occupying a giant retail share of 42% by itself.
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, Skoal and Red Seal.
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. Governments 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 1.5-2% 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 30-40% 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 cigarettes 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. For example, despite a 4% decline in the number of cigarettes sold by Philip Morris USA from 2010 to 2011, its revenues from cigarettes remained flat.
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 Altria Retail Share in Smokeless Tobacco
Altria's market share in Smokeless Tobacco is the market share occupied by smokeless tobacco products of USSTC (US Smokeless Tobacco Company) and PM, USA in terms of volume of sales.
Altria acquired USSTC in 2009 and its market share grew from 54.5% in 2009 to 55.2% in 2010. Its market share was at 55.4% in 2012 led by strong performance from Copenhagen.
Going forward, we expect Altria's retail share in smokeless tobacco to witness some improvement due to a combination of strong brand name, expansion into other states and new product launches. We expect Altria's market share to touch 56.2% by the end of the Trefis forecast period.
Trefis considered the following factors for its forecast
- Well positioned in the high growth niche smokeless tobacco segment
- Altria acquired USSTC as a part of its acquisition of UST in 2009. Its current product portfolio includes leading smokeless tobacco brands such as Copenhagen, Skoal, Red Seal and Malboro Snus, which occupy more than 45.2% of the market share in the US in terms of volume of sales. It is thus well positioned to grow its retail market share in the high growth category of smokeless tobacco.
- Innovative new products
- Altria has entered into an agreement with Okono, an affiliate of Fertin Pharma, to develop innovative non-combustible nicotine containing products.
- In 2011, Skoal volume was helped by the launch of Skoal X-tra varieties & two new Skoal Snus products.
- Copenhagen benefited from Wintergreen pouches introduced in 2011.
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- Strong competition
- USSTC and smokeless tobacco products of PM, USA face competition for market share from American Snuff and Swedish Match, which also occupy a significant market share of 29% and 19% in the US respectively and are coming up with new product launches to benefit from the strong growth.
- Strong pricing
- Recent data suggests that Altria's market share in retail dollars has stayed fairly stable in spite of falling market share in terms of volume of sales. Thus, this indicates that the smokeless tobacco products might be following a similar path of the cigarettes segment to raise prices in order to maintain profitability.
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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