Can Marlboro’s Dominant Position Result In Further Growth For Altria?

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MO: Altria Group logo
MO
Altria Group

Altria (NYSE:MO) is set to report its third quarter earnings on October 27, 2016. According to consensus estimates, the company will report revenues of $5.11 billion and an EPS of $0.80.

MO Pre Earnings Q3 2016

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On October 10, 2016, Anheuser-Busch InBev completed its business combination with SABMiller. In connection with this, Altria received 185.1 million restructured shares of the combined company, which represents 9.6% of the economic and voting interest, and ~$5.3 billion in pre-tax cash. The addition of the stake in AB InBev enables the company to benefit from diverse income streams. The two beer companies are highly exposed to the fast growing markets of Africa, Latin America, and Asia, resulting in higher earnings and dividend growth prospects. As a result of this merger, Altria expects a pre-tax gain of approximately $13.7 billion, or $4.55 per share, a majority of which will be recorded in the fourth quarter of 2016. As a result of how the gain will be accounted for, Altria trimmed its 2016 adjusted earnings per share outlook to a range of $2.98 to $3.04, from its previous $3.01 to $3.07. The company also announced the expansion of its share buyback program, from $1 billion to $3 billion, to be completed by the end of the second quarter of 2018.

Altria faces increased pressure as a result of a decline in smoking rates in the US. The smoking rate has been on the decline since the mid 1960s, as a result of the tax hikes, ban on tobacco marketing and smoking in public places, and growing awareness among the consumers. The smoking rate has come down from 21% in 2005, to under 17% today, and is estimated to decline at a rate of 3% per annum till 2040. The US, from where Altria generates all of its revenue, has had one of the steepest declines in the prevalence of smoking.

Smoking Rate

Moreover, a number of states in the US are considering raising the cigarette taxes in the coming months. One such regulation is the California Proposition 56, which seeks to increase the excise tax from $0.87 per pack of cigarettes to $2.87. This will put pressure on companies, such as Altria, to raise the prices of their tobacco products. Thus, the fall in cigarette volumes for the company may be even higher than the 3% reported in the second quarter earnings. However, Marlboro’s dominant position in the US, wherein it has garnered 44% of the market share, and the lower price elasticity of tobacco products, makes the company less vulnerable to price increases. This will ensure that the revenue of the company can continue to increase, despite the declining volume of cigarettes sold.

2015 Marlboro Share

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Altria.
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