Altria Group Q3 Results Exceed Expectation

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

Altria Group (NYSE: MO) reported its third quarter results on October 29. Net revenues for the quarter came in at $5.86 billion, against analysts consensus forecasts of $4.7 billion and the group reported EPS of $0.69 per share, one cent above the analysts consensus forecast. [1]. The company also affirmed its annual EPS increase guidance to be in the 7-9% range for 2014 over 2013. [2]

See Our Complete Analysis For Altria

Why Did Revenues Increase

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The out-performance on the revenue front is expected to be on account of several factors. The first is the improvement in pricing of products in the smokables category, especially the premium Marlboro brand. There was a 12 cents increase in the average pack price of Marlboro cigarettes over the same quarter last year. Part of this increase may be due to a decline in shipments volume exceeding the decline in demand. Marlboro shipment volume decline 2.8% in Q3 2014 compared to the similar period in 2013. There seems to have been a secular rise in the price of cigarettes across the industry, with Altria rival Reynolds American also reporting significant increase in the price of cigarettes this quarter. [2]

Another factor for the rise of prices could have been the innovations made to the brands. The brand architecture for Marlboro introduced in 2012 divides it into four flavors: Red, Gold, Green and Black.This makes it easy for the company to cater and market to different consumer segments easily. Of these, Black has proven to highly successful and has been pointed out by the management as a major contributor to smokables revenue growth. [3]

The decrease in the rate of decline of the cigarette market in the U.S. also helped revenues this quarter. One of the alarming trends for those invested in tobacco stocks had been the pickup in speed of the rate of declines in the cigarette market in the U.S. While the market size was decreasing at a rate of only 3.5% for the last three years, the first half of this year has seen the market fall at 4.5%. As per the management comments during competitor Reynolds American’s Q2 earnings call, the industry volume declined only 2.7% in the quarter. [2]

Market Shares Enhanced

In our pre-earnings article we had expressed our expectation that market share for Altira’s cigarettes are likely to be enhanced in line with the historical trend. Rival, Reynolds American had reported a marginal reduction in its market share over the previous quarter. As per the Reynolds American management, the industry had managed to reduce its inventory this quarter by 800 million units year on year. Reynolds American itself had contributed to only 200 million units of these. A good part of the remainder could have been due to Altria. This could have helped Altria maintain its market share growth of 0.1 share point.

In the smokeless category, there were mixed results. While the Copenhagen brand delivered 1.4% year on year share point increase, some of this was undone by lackluster performance from the Skoal brand. The wine business of Altria also continued to grow steadily. It registered a 3.5% increase year on year in both revenues and shipment volume. As per our model, smokeless contributes 15% of the value of the stock, and wine a tenth of that.

The largest chunk of the Altria stock as per our models in smokables (cigarettes and cigars), which constitute ~63% of our valuation of Altria’s equity. We have a valuation of ~$42 per share for Altria group, which is five dollars below the market price of ~$47. Our estimates for Altria’s 2014 revenue net of excise taxes is $17.7 billion compared to Bloomberg Businessweek analysts consensus of $17.8 billion.

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Notes:
  1. Altria Q3 Earnings Preview, trefis.com []
  2. Altria Q3 Earnings Call Transcript, seekingalpha.com [] [] []
  3. Altria 2013 Shareholder Letter []