Altria Earnings Review: Sales Increase, But Falls Short Of Estimates

Tobacco giant Altria (NYSE:MO) announced its fourth quarter and full year results before markets opened on Thursday. The company’s adjusted diluted earnings per share increased 1.5% to $0.67, against Thomson Reuters’ consensus estimates of $0.68, while the full year figure was $2.80, a growth of 8.9% over the previous year. The growth here was primarily driven by higher reported operating companies income (OCI) in the smokeable and smokeless products segment, as well as a lesser number of shares outstanding, partially offset by lower earnings from Altria’s investment in SABMiller, and a higher tax rate. While revenues were higher by 2.6% to $4.73 billion, these too were a slight miss, given the estimates. ^[1]

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 Smokeable Products Segment Leads Growth Statistics

Altria was able to deliver a total shareholder return of 23.1%, out-performing the S&P 500 and the Food, Beverage, and Tobacco Index. ^[2]

The smokeable products segment was the big profit generator, led by Marlboro. The brand was able to increase its retail share by two-tenths in the U.S., in both the fourth quarter and the full year. The company expanded distribution of Marlboro Menthol nationally, and this aided in the momentum. The segment as a whole had a strong 2015, with 11% growth in the income, primarily due to higher pricing and the benefit of the federal tobacco quota buyout expiration. While cigarette volume decelerated 2.5% in the fourth quarter for the company, the full year rate was a plus 0.5%. The volumes in the industry, as a whole, fell 0.5% for the year. Higher cigar volume also contributed to the segment’s performance in the fourth quarter and the full year.

The e-cigarette market has lost steam as of late, with growth rates of 50% and 100% a thing of the past. In the smokeless products segment, revenue grew 4.7%, while the OCI grew 8.2%, again due to higher prices, with increased promotional costs weighing it down. The domestic shipment volume improved by 4% due to growth of its Copenhagen brand, which managed to increase its retail share by 1.1 percentage points, and was the fastest growing brand in its category. In order to build on this, the company has decided to expand Copenhagen Mint nationally. As a whole, PM USA’s total retail share rose to reach 51.4% in Q4 and 51.3% for the full year.

The wine segment’s revenues witnessed over 7% growth in the fourth quarter, with the holiday season driving shipment growth. The company also managed to increase its OCI margins by 1.2 percentage points. The negative impact of foreign currency translations resulted in earnings of $757 million, reflecting a ~25% decline. The same factor was also responsible for a 17% decline in earnings from its investment in SABMiller.

Company Provides A Robust 2016 Guidance

Altria predicts a 7%-9% growth for its EPS for FY 2016, and expects it to be in the range of $3 to $3.05, excluding restructuring charges. The company is putting into effect a productivity initiative to reduce its SG&A expenses and to implement a leaner organization. Such an endeavor will provide ~$300 million in annual savings by the end of 2017. Pre-tax costs associated with this would reach $140 million. Altria’s CEO, Marty Barrington, expects the industry cigarette volume decline rates to go back to the minus 3% and minus 4%, seen earlier, in the next few years.

The company benefited in FY 2015 from the feel-good factor, due to the low unemployment levels, the increase in the housing market, and the low gasoline prices. The U.S. Food and Drug Administration (FDA) is also considering regulating the e-cigarette industry, which is expected to expand to a $10 billion market in the U.S. by the end of 2018; but such a regulation may hamper this growth. ^[3] In such a scenario, all manufacturers of e-cigarettes, nicotine gels, and other tobacco-related products would be required to obtain their approval before launching their products into the market. This may be very costly for companies in this segment. Altria, with ample resources on its side, would be able to manage this; but it may slow down the anticipated growth rates.

Key Financial Results

• Reported diluted EPS increased 1.6% to $0.64 in Q4 and 4.3% to $2.67 for the full year.
• Net revenues grew 1% to $6.3 billion for the full year with OCI increasing 3% to $2 billion.
•  Smokeable products segment revenue expanded 0.8% for the quarter and 3.9% for the full year, with Marlboro increasing its retail share to 44%.
• Smokeless products segment revenue grew 4.7% for the quarter and 3.9% for the whole year.

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1. Altria 2015 Fourth-Quarter and Full-Year Results, Press Release [↩]
2. Altria 2015 Fourth-Quarter and Full-Year Results, Earnings Call Transcript [↩]
3. The FDA May Soon Be Able To Vaporize E-Cigarette Products [↩]