Three Trends That Impacted Altria’s Business In 2014

In this article, we take a look at the three trends that dominated the Altria Group’s (NYSE:MO) business in 2014. The first of these was a sustained improvement in pricing over the first three quarters. Secondly, the company made successful forays into the rapidly growing e-cigarette market. The third trend was the declining user base for cigarettes in the U.S.

We have a price estimate of roughly $44 for the Altria Group, which is about 10% below the current market price.

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Margins Improve On Better Pricing

Altria has been able to drive meaningful earnings growth through regular price hikes over the past several years. Altria’s sustained pricing improvements can also be attributed to its leading market share in the cigarette space. Marlboro, the company’s flagship cigarette brand, holds a roughly 44% share of the retail market in the U.S. It has been the leading brand in the market for more than 30 years now. Such brand loyalty allows Altria to lead in pricing measures. The hike in prices in each of the three quarters in 2014 to date has been to the tune of 2-3%.

Altria’s Potential In The E-Cigarette Market

Although Altria entered the e-cigarette market a little late, we believe the business could add up to $4 per share to its total value. We expect Altria’s share in the U.S. e-cigarette market to go up to 15% by 2021. This is on account of the moves it has made in the segment recently. In December 2013, Altria announced a cross-licensing agreement with Philip Morris International. This gives Altria exclusive rights to market Philip Morris’ heat-not-burn cigarettes in the U.S. During the first quarter of 2014, Altria also completed the acquisition of Green Smoke Inc.’s e-cigarette business. Green Smoke is one of the premium e-cigarette brands in the U.S. This fits well within Altria’s overall marketing strategy, which is focused on premium brands. Most recently, Altria also initiated the national roll-out of the MarkTen e-cigarettes. MarkTen gained a 48% share of the retail cartridge market in the test market of Arizona within just seven weeks of launch. (See Altria Group’s Potential In The E-Cigarette Market)

Decline In Number Of Smokers

A notable trend has been the rapid rate of the decline of the cigarette market in recent years. From 2009 to 2013, the consumption of traditional cigarettes in the U.S. dropped by more than 14%. There was a decrease in the rate of this decline towards the latter half of 2014. While the market size was decreasing at a rate of only 3.5% for the previous three years, the first half of this year saw the market fall at 4.5%.

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