Altria’s Earnings To Be Higher On Better Margins

by Trefis Team
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Altria Group, Inc.
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Altria (NYSE:MO) is scheduled to announce its 2013 fourth quarter and full-year earnings on January 30. We expect the company to report adjusted diluted earnings per share (EPS) of $2.43, compared to $2.21 in 2012, which implies ~10% y-o-y growth. According to our estimates, earnings growth would primarily come from thicker operating margins, partly offset by lower sales volume of traditional cigarettes.

Altria is one of the largest tobacco companies in the U.S. with over 50% market share in cigarettes and smokeless tobacco products. The company’s brand portfolio includes well-known names such as Marlboro, Copenhagen, Skoal and Black & Mild. Cigarettes and smokeless tobacco products make up more than 75% of Altria’s total value by our estimates.

Our $43 price estimate for Altria is about 15% above its current market price.

See Our Complete Analysis For Altria

Better Margins To Drive Earnings Growth

Cigarette manufacturers have been able to consistently improve their operating margins through regular price hikes coupled with relatively stable input costs. This is primarily because of the sticky nature of the demand for cigarettes due to their inherent addictive nature and consumer brand loyalties. Altria being the largest player in the U.S. tobacco market has gained the most from this trend. According to our estimates, the company’s consolidated EBITDA margins, adjusted for non-recurring and non-cash items, improved by ~400 basis points from 2009 to 2012.

This could also be attributed to the fact that it controls leading brands in both cigarettes as well as smokeless tobacco categories. Marlboro, the company’s flagship brand, commands more than 42% of the retail market for cigarettes in the U.S. and has held the leading position in the market for more than 30 years now. Such brand equity allows Altria to lead in pricing measures and increase its value share in the shrinking tobacco industry while maintaining decent volume share growth as well. During the first three quarters of 2013, the company was able to grow its revenue per cigarette by ~3% y-o-y, while excise taxes and other costs per cigarette remained largely stable over the same period. We expect the trend to manifest itself in Altria’s fourth quarter earnings as well. [1]

Cigarette Consumption Continues To Decline

Altria’s smokable products division that sells cigarettes and cigars makes up more than 60% of the company’s total value by our estimates. The division operates in a very challenging regulatory environment marked by highly restrictive marketing rules and ever-increasing indirect taxes. Moreover, the growing use of smokeless tobacco products and electronic cigarettes due to increasing health consciousness among consumers is further aggravating the operating conditions of cigarette manufacturers. The consumption of traditional cigarettes in the U.S. has dropped by ~10% in volume since 2009. We expect this accelerating trend to pose a stiff challenge to the company in the long run. [1]

Diversification Key To Sustained Earnings Growth

Under the given circumstances, we believe that Altria’s diverse portfolio, which apart from Marlboro and other cigarette brands also includes leading smokeless tobacco brands, Chateau Ste. Michelle and Columbia Crest wine brands, as well as a 26.9% stake in the world’s second largest brewer, SABMiller, which is one of its biggest assets. The company’s leading position in the smokeless tobacco category has somewhat insulated it from consumers opting for chewing tobacco and snuff instead of cigarettes, as its Copenhagen and Skoal brands hold more than 50% share of the U.S. smokeless tobacco market.

However, Altria has been relatively late to enter the burgeoning e-cigarettes market in the U.S. It has still to announce a national roll out plan for its MarkTen e-cigarettes. On the other hand, Reynolds American, the second largest tobacco company in the U.S., plans to launch its Vuse e-cigarettes nationally this year, while Lorillard already owns the top-selling e-cigarette brand in the country, Blu. We believe that there is a multi-billion opportunity for Altria in the e-cigarettes market, and look forward for an update on the performance of its MarkTen e-cigarettes in the test markets of Indiana and Arizona. (See: Altria Could Add $5 Billion In Value By Selling E-Cigarettes)

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Notes:
  1. Altria SEC Filings, sec.gov [] []
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