Altria (NYSE:MO) reported earnings growth for the second quarter on July 23, primarily on better margins. However, the company’s revenues declined, as higher revenue per cigarette was more than offset by lower volumes. Altria’s adjusted diluted earnings per share (EPS), which excludes the impact of special items, grew 5.1% to $0.62. The company also stated that it is on track to launch its first e-cigarette brand in a lead market next month. 
Thicker Margins On Smokes Drive Earnings Growth
Altria’s reported cigarette volume decline at 6.7% was worse than expected primarily due to inventory build up during the second quarter last year. It weighed heavily on the company’s top line, which declined ~3% y-o-y, as higher revenue per cigarette from better pricing was more than offset by lower volumes.
The shipment volume decline is more concerning due to the fact that it was led by the company’s premium brands. The number of premium cigarettes sold by Altria, which includes Marlboro sales volume declined by ~7.5% while the discount brands shipment volume actually improved by ~4%. This questions the sustainability of the company’s pricing ability to boost its revenue per cigarette in the long run.
Altria’s revenue per cigarette improved by just over 3% y-o-y as it was partially offset by unfavorable volume mix. However, the company’s operating cost per unit remained relatively flat year on year, which resulted in better margins for the smokable products division. This helped the company report earnings growth despite lower revenues. Adjusted operating margin earned by the company on the sale of cigarettes and cigars improved by ~160 basis points y-o-y.
Altria Rides On Smokeless Growth With Copenhagen
Altria’s smokeless products division continued to perform well on growing overall market size and higher retail share of its Copenhagen brand. Revenue growth of ~7.5% from the division was bolstered by an improvement of over 300 basis points in adjusted operating margin. The company’s Copenhagen brand that holds ~30% retail share of the smokeless tobacco market in the U.S., sold ~9% more as compared to the same period last year. We expect Altria to continue to lead the smokeless category with volume and value share gains through its popular brands.
Altria also announced that it is on track to introduce its first e-cigarette brand into a lead market next month. This is an important step by the company as its diversified portfolio certainly needs some weightage in the emerging category that is partly responsible for driving consumers away from traditional cigarettes. Consumer response to Altria’s new MarkTen e-cigarettes will be critical to the company’s success in the e-vapor category. We will therefore be following it closely over the next couple of quarters.
We have updated our price estimate for Altria to $38.5, which implies ~10% upside to the stock from its current valuation.Notes:
- Altria Reports 2013 Second-Quarter and First-Half Results; Revises 2013 Full-Year EPS Guidance, investor.altria.com [↩]