The Altria Group Q1 2015 Earnings Preview: Impacts Of The Economy and Innovation Will Drive Results

The Altria Group (NYSE:MO) is slated to release its Q1 2015 results on April 23. We expect the three important aspects of these results to be: the impact of the economic uncertainty, new product launches, and changes in expenses. While the economy is likely to dampen Altria’s results, new product launches could have the impact of improving it. There are likely to be mixed results on the expenses front.

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A Damp Economy in Q1 2015

The demand for cigarettes is a function of the economic well being of the smokers. A growing economy that adds jobs and sees wages grow improves the lot of lower and middle classes, who form the majority of the consumers for the cigarette companies. This leads the consumers to increase their discretionary purchases, leading to greater purchases of items such as cigarettes. However, early signs indicate that the U.S. economy under-performed its potential in Q1 2015. While the GDP growth data for Q1 2015 will be out only toward the end of Q2 2015, an early estimate by the Atlanta Federal Reserve puts this figure at close to zero. ^[1] This is a big slowdown, considering that the Q4 2014 GDP annualized growth rate was 2.2%. ^[2]

Other economic metrics also portray a struggling economy. Employment by private firms decreased significantly in March. While they were expected to add 240,000 jobs, the reported figure was only 129,000. This is the slowest pace of growth since December 2013. ^[3] Consumer confidence also dropped in the months of February and March. This took the overall index of consumer sentiment from 98.1 in January to 93 in March. ^[4] These disappointing metrics may also imply a reluctance on the part of the lower and middle income groups to loosen the purse strings as of yet. This, in turn, could have led to a greater reduction in the number of cigarettes sold in the U.S. in Q1 2015. In Q4 2014, while the industry sales volume decreased by 2.5%, Altria had managed to limit its reduction in sales volume to 2%. ^[5]

Will Innovative Products Perform?

The two categories of innovative products that the company is betting on are menthol cigarettes and e-cigarettes. ^[6] Menthol is the only flavor allowed to be added to cigarettes in the U.S. ^[7] Altria has done well in this segment to grow its market share from 18% in 2009 to 26% in 2014. ^[8] Making further inroads into this segment, Altria expanded the distribution of its new product Rich Blue to 28 states in November 2014. This could have been further expanded in 2015, leading to market share gains for the company in the segment.

The e-cigarette category has thrown up a challenge to Altria. It is believed that the company’s product Mark Ten is having difficulty ensuring repeat purchases, leading to threats to its market share position. While the company took great pride in calling the brand a top-three contender in the category in Q3 2014, it had to dilute this claim to “among the top e-vapor brands” in the next quarter. This is despite the national roll-out of the product which saw it being retailed in 130,000 stores. ^[9] The management has played down these challenges, saying that they expect there to be some volatility in the market share positions until the category matures and the consumers develop their brand preferences.

On the Expenses Front

The benevolent effects of the roll back of the Fair and Equitable Tobacco Reform Act (FETRA) is believed to extend to Q1 2015 as well. This was a program aimed at the industry funded buyout of tobacco farming quota holders. It was enacted in 2004 to protect tobacco farmers who had earlier benefited from high tobacco prices ensured through production quotas. With a decline in the demand for tobacco, many of them were facing threat of closure. The industry was asked to buy out their quotas. This was costing Altria $500 million each year. With the winding up of the program, Altria has been spared this expense. ^[10]

Marketing and R&D expenses are expected to continue their increasing trend. This is because of the continued development and promotion of the new e-cigarette category of products, which we have identified as an innovative product earlier in the article. Such expenses were held partly responsible for the increase in the expenses under this category by $200 million year on year in 2014. ^[5]

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1. Fed Has GDP Growth At Zero [↩]
2. Gross Domestic Product: Fourth Quarter [↩]
3. U.S. Private Payrolls Hit Huge Speed Bump [↩]
4. United States Consumer Sentiment [↩]
5. Altria Group Q4 2014 Earnings Call Transcript [↩] [↩]
6. Reynolds Lorillard Deal [↩]
7. Newport Cigarettes Menthol Strategy [↩]
8. Altria Introduces Menthol Cigarettes [↩]
9. Only One Winner In E-Cig War [↩]
10. Altria To Profit From Expiration Of Law [↩]