Altria Earnings Preview: Can Altria Buck The Declining Cigarette Volumes Trend Again?

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Altria (NYSE:MO) is set to release its earnings report for the fourth quarter of 2015 on January 28. While the company experienced a boost in its sales in the first half of the year, as a result of higher demand and prices, lower sales are expected in the fourth quarter as compared to the previous quarters. The full-year adjusted diluted EPS guidance provided by the company is in the range of $2.76 to $2.81, with analysts expecting it to be on the higher side of the range. This guidance represents a growth rate of 7.5% to 9.5% over the corresponding 2014 figure. [1]

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Shift Towards E-Cigarettes

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The progress of the U.S. economy seems to have slowed down in the recent months, which may have curbed the demand for tobacco products. According to U.S. census data, retail sales have fallen by 0.1% in Q4 as compared to Q3, although it did pick up a little in December. [2] The industry has witnessed declining demand for cigarettes due to the ongoing anti-tobacco campaigns and tax hikes, forcing companies to raise cigarette prices. However, in the Q3 earnings call, the company had reported a 1.5% growth in the cigarette shipment volumes, year-to-date. [3] In the recent quarters, cigarette volumes have benefited from a decline in gasoline prices, which have left consumers with more money in their pockets. If gas prices remain low in 2016, cigarette volumes may not decline at the 3%-4% rate witnessed in the industry in the last few years. Vivien Azer, managing director of Cowen Group, suggested that in mid-December, U.S. cigarette volumes were down 0.4% in the four-week period, easing up on the 0.8% decline in the 12-week period. [4]

Cigarette decline rate

The company is now focusing on its e-cigarette category and less harmful tobacco products for growth. Greater health consciousness and increased government regulation is convincing customers to turn to e-cigarettes. Such trends are expected to boost the top line in the earnings to be reported. Growing popularity of its Mark Ten brand in the U.S. and the successful launch in Indiana in 2014 is encouraging expansion nationwide. Through its subsidiary Nu Mark, Altria has enlarged distribution of Mark Ten XL e-vapor products and has continued to appraise its retail positioning of Green Smoke e-vapor products through various lead markets. Altria has also entered into an agreement with Philip Morris for distribution of its  e-vapor products internationally, and also to research and develop new products in this category. During the fourth quarter, the company is also expected to have had a growth in the total shipment volume in the wine segment, due to the holiday season in the United States.

Estimated US e-vapor growth

Marlboro Man Still Reigns Supreme

The company’s most famous brand, Marlboro, continues to lead the market, by a mile. The brand was able to gain one-tenth of retail share in the third quarter and two-tenths for the year-to-date. This had helped in the strong earnings performance in the third quarter, especially in the smokeable product segment.

Marlboro Retail Share

 

The company is not as exposed to foreign currency fluctuations as its peers, since its sales are mostly in the U.S. Other multinationals have suffered considerably as a result of the strengthening of the U.S. Dollar. However, the company does have to worry about this when it comes to its 27% equity investment in SABMiller; but this forms a relatively small share of its earnings.

EPS Performance

The company has backed its 2015 full-year guidance, with diluted EPS to be in the range of $2.76 and $2.81. This represents a growth rate of 7.5% to 9.5% from EPS of $2.57 reported in FY 2014. The company states that a more moderate EPS figure in Q4 is expected, as compared to previous years, due to a number of factors. The benefit received from the expiration of federal tobacco quota buy-out payments and lower gasoline prices has been offset by a higher tax rate on its operations. The tax rate is expected to increase from 34.7% in FY 2014 to 35.3% in FY 2015. Since the merger of Reynolds American and Lorillard, Altria together with the newly merged company, holds 90% of the U.S. tobacco market. This gives them sufficient market power to increase prices, and furthermore, such a situation impedes competitive forces. Such a state of affairs should ensure robust profit growth.

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Notes:
  1. Altria Reports 2015 Third-Quarter and Nine-Month Results []
  2. U.S. Retail Sales, Census Data []
  3. Altria Q3 2015, Earnings Call Transcript []
  4. What’s Ahead For Cigarette Sales? []