Trends That Impact The Altria Group In The U.S.

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Altria Group

The percentage of adults who smoke in the U.S. has been decreasing significantly. Various steps taken by the government are targeted at reducing smoking even further. In this article we take a look at the impact of such measures, particularly on the Altria Group (NYSE:MO).

We have a price estimate of roughly $44 for the Altria Group, which is about 18% below the current market price of around $54.

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See Our Complete Analysis For Altria

Trends In The Smoking Rate

The percentage of U.S. adults who smoke has seen a 3 percentage point drop between 2005 and 2013. At the start of this period, 20.9% of American adults smoked. At the end of this period, that rate was only 17.8%. In the same time period, the number of these smokers who smoked daily fell from 80.8% to 76.9%. These trends show three important things: the user-base for cigarettes is shrinking. the uptake of smoking among non-smokers is not stemming the decrease in smoking, and existing smokers are smoking less frequently. [1]

The Decline In Smoking Could Speed Up

These trends may become stronger due to certain social and regulatory changes. The director of the U.S. Centers for Disease Control and Prevention (CDC) Office on Smoking and Health has identified some proven strategies that reduce smoking rates further.  ((Smoking In The U.S. Declines To An all Time Low))

The first strategy relates to changing the public image of tobacco. Large scale counter-advertising campaigns against smoking have contributed to a decline in smoking among younger people. [2] The second important strategy is the extension of smoke free zones, which could decrease the rate of smoking even further. Lastly, the Tobacco Control Act of 2009 allows the FDA to regulate the cigarette industry in many ways. It can specify the maximum levels of nicotine content, and prevent manufacturers from introducing new products or modify existing products without its permission. ((ref:3))

Other measures include increasing taxes on tobacco. For instance, it has been estimated that a 10% increase in taxes, reduces the number of cigarettes consumed by 3-5%. [3]

Impact On Altria

The cigarette market in the U.S., after showing an accelerated decline of over 4% in the first half of 2014, declined at a slower rate of 3.5% in Q3 2014. If the decline in the market is accelerated, our valuation of Altria will decline, as shown in the sensitivity table below.

Sensitivity Of Altria Price Estimate To Cigarette Market Size Reduction

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Notes:
  1. Number Of American Smokers Dwindles []
  2. The Health Consequences Of Smoking []
  3. ref:3 []