Cigarette companies in the U.S. are often overlooked given the unpopularity of the tobacco business and the industry’s falling cigarette volumes. Altria Group Inc (NYSE:MO), in particular, receives a fair share of this criticism since the company operates only in the U.S., a country with one of the harshest regulatory environments. Here we look at two of the most compelling reasons investors might take a second look at Altria by identifying the key growth drivers to its business in the coming years. Altria’s main competitors are Reynolds American (NYSE:RAI) and Lorillard (NYSE:LO) in the U.S. We have a $31 price estimate for Altria, which is about 6% above the market price.
1. So What if Cigarette Volumes are Decreasing
For 2011, cigarette revenues stood at $21.4 billion, down 1.1% from 2010. However, more importantly, revenues net of excise duties were up 0.4% at $14.6 billion. This was in spite of the fact that total cigarette shipment volumes declined 4% for the year. Clearly, the company is focused on generating higher profits rather than increasing its market share through price competition.
The company increased prices for all of its cigarette brands twice last year, the second of which was in December. Had Altria been worried about the falling cigarette volumes, the company certainly wouldn’t have increased the prices. By increasing the cigarette prices, the company also shields itself from excise duties better thereby increasing the profit margins. The company reported operating income for the segment rose 2.3% to $5.6 billion. Excluding special items, the operating income was even higher at $5.9 billion.
2. Altria Dominates Smokeless Tobacco Products
If anyone thinks that the escalating cigarette prices will force consumers to quit smoking, then they are probably wrong since smokers will find something or the other to smoke. And smokeless tobacco products, currently spared from the wrath of the regulatory environment, are doing well. They are usually perceived to be less harmful and attract lower excise duty. Moreover, since they do not involve smoke, they can be consumed at places that otherwise prohibit smoking.
As per our estimates, Altria commands a 43.7% market share (by volumes) in the U.S. smokeless tobacco market and we expect it to increase to 45.2% by the end of our forecast period.
Total volume shipments for Copenhagen and Skoal combined witnessed a healthy growth of 6.5%. Both the brands benefited from new product introductions in the year 2011 which included Skoal Snus and availability of Copenhagen Wintergreen and Skoal X-tra in pouches. The gains were partially offset by volume declines in its other portfolio brands, including Marlboro Snus. Since the smokeless tobacco segment is growing at 7% annually, this is a significant revenue addition for the company.
Altria has delivered solid financials for other segments such as Cigar and Wine. It also has a 29% stake in SABmiller. There is a lot more to Altria than falling cigarette volumes.