Altria’s Diverse Brand Portfolio Caters To All Income Levels

+12.38%
Upside
51.09
Market
57.42
Trefis
MO: Altria Group logo
MO
Altria Group

That cigarette consumption in the U.S. is declining is a known fact. But what exactly is the country’s largest cigarette player Philip Morris USA, owned by Altria Group (NYSE:MO), doing to maximize shareholder return?

Philip Morris USA’s strategy on cigarettes revolves around generating volume growth through discount brands and maintaining strong pricing of its premium brands such as Marlboro (which have higher margins). Besides cigarettes, Altria has also upped its efforts to develop lower risk, smokeless tobacco products. The company competes with Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI).

We have a $32.60 price estimate for Altria, which is in line with the current market price.

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Mix of Strong Pricing and Discount Brands

The company raised its cigarette prices twice in 2011. The second price hike, implemented in December, affected all 14 of its brands. The two rounds of price hikes helped Marlboro gain retail share (i.e. in $ terms) in spite of its volume declines. Philip Morris USA also extended the Marlboro brand by introducing Marlboro Black in December 2011. For the first three months of 2012, the volumes of discount brands (such as Basic and L&M) rose almost 18% whereas Marlboro volumes witnessed a 3.4% decline y-o-y. [1] However, a greater proportion of discount brands will tend to reduce the average revenue per cigarette.

Altria has also tried to boost its cigarette volumes through unconventional methods like launching its own website named Citizens For Tobacco Rights in December 2011, with the aim to help improve its public image. There is also a section on the website which educates users about the unreasonably high taxes imposed on the tobacco industry.

Smokeless Tobacco Products Show Promise

In the beginning of 2012, Altria entered into an agreement with Okono, an affiliate of Fertin Pharma, to develop innovative non-combustible nicotine containing products. The company has also introduced new variants and fresh packaging to appeal to a wider range of consumers. For example, in 2011, Skoal volumes were helped by the launch of Skoal X-tra varieties & two new Skoal Snus products. Similarly, Copenhagen benefited from Wintergreen pouches introduced last year. We expect the market for smokeless tobacco products to grow an annual rate of 4% (in volume terms) over the next few years.

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Notes:
  1. MO 10-Q []