Altria Posts Earnings Growth On Pricing Gains

+2.73%
Upside
44.51
Market
45.73
Trefis
MO: Altria Group logo
MO
Altria Group

Altria’s (NYSE:MO) first quarter earnings rose due to thicker margins. Its adjusted diluted earnings per share (EPS) grew by 5.6% y-o-y. Altria also extended its market share in both cigarettes as well as smokeless categories, riding on the strong performance of its key brands, namely Marlboro and Copenhagen. Altria also reaffirmed its 2014 full-year adjusted diluted EPS guidance to be in a range of $2.52 to $2.59. This bolsters our faith in the company’s ability to drive future earnings growth on pricing gains, as cigarette consumption in the U.S. continues to decline.

We currently have a $43 price estimate for Altria, which is around 10% above its current market price.

See Our Complete Analysis For Altria

Relevant Articles
  1. What’s Next For Altria Stock After A 15% Fall In A Year?
  2. What’s Next For Altria Stock After A 6% Fall In A Month Amid Downbeat Q3?
  3. Is Boston Scientific A Better Pick Over Altria Stock?
  4. Will Altria Stock Rebound To Its 2022 Highs?
  5. Here’s What To Expect From Altria’s Q1
  6. Should You Buy Altria Stock At $44?

Pricing Remains The Key Value Driver

Pricing continues to remain the key growth driver for cigarette manufacturers. Low sensitivity of consumption demand to price increases, which is primarily due to the inherently addictive nature of cigarettes, has allowed cigarette manufacturers to drive meaningful earnings growth through regular price hikes over the past several years. The trend manifested itself during Altria’s first quarter earnings as well. The company’s net revenue from the sale of cigarettes and cigars increased 1.2% y-o-y, despite a 3.5% decline in sales volume. Moreover, adjusted operating income from the segment increased by 6.4% y-o-y, as margins improved by 220 basis points on relatively stable per unit costs.

Apart from the addictive nature of cigarettes, Altria’s consistent earnings growth performance can also be attributed to its leading market share in the cigarettes space. Marlboro, the company’s flagship cigarette brand, holds ~44% share of the retail market in the U.S. and has been leading the market for more than 30 years now. Such brand loyalty allows Altria to lead in pricing measures and increase its value share in the shrinking tobacco industry while maintaining decent volume share growth. During the first quarter, Marlboro’s net pack price stood at $5.91, up $0.11 or ~2% from the same period last year. At the same time, its retail market share also improved by 20 basis points over last year.

Diversification Bolsters Earnings Growth

Altria’s smokable products division that sells cigarettes and cigars makes up more than 60% of the company’s total value by our estimates. However, the division operates in a very challenging regulatory environment marked by highly restrictive marketing rules and ever-increasing indirect taxes. In addition, the growing use of smokeless tobacco products and electronic cigarettes due to increasing health consciousness among consumers is further aggravating operating conditions for the division.

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, 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.

Altria would like to get into a similar position in the burgeoning e-cigarettes market in the U.S., which is estimated to have tripled in size from around $500 million in 2012 to $1.5 billion last year. The company has made some quick moves over the past few months in order to achieve this target. It started selling its MarkTen e-cigarettes in the test markets of Indiana and Arizona in the second half of last year. Encouraged by positive results, the company decided to start rolling out the product nationally by June this year.

In order to diversify its product offering in the category, Altria completed the acquisition of Green Smoke Inc.’s e-cigarettes business during the first quarter. Being one of the premium e-cigarette brands in the U.S., Green Smoke also fits well with Altria’s overall marketing strategy focused on premium brands. Apart from this, Altria also entered into an exclusive agreement with Philip Morris International (NYSE:PM) to commercialize its e-cigarette brands internationally. (See: Altria Making Fast Moves In The Burgeoning E-Cigarettes Market)

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology