Altria’s Earnings Will Show If Stock’s Run Can Continue

MO: Altria Group logo
Altria Group

Altria Group Inc (NYSE:MO) is scheduled to announce its Q2 earnings on July 24. The stock has climbed more than 20% in 2012, outperforming the broader indices. The year has been good for Altria so far as it won a Minnesota litigation case involving the ‘Lights’ cigarettes, so the company will have more cash to pay out as dividends to its shareholders. Earlier in May, Altria reaffirmed its 2012 full year adjusted diluted EPS guidance of $2.17 to $2.23, an increase of 6% to 9% over the previous year. We expect revenue growth to be flat to low single digit, helped by strong pricing of its cigarettes and smokeless products.

Limited Top Line Growth for Cigarettes

Some of the most recognizable brands under Altria’s cigarettes portfolio are Marlboro, Virginia Slims, Merit, Parliament, Benson & Hedges, and Chesterfield. Most of the company’s top-line growth for the division, if any, is through the periodic price hikes implemented on its cigarettes. The latest round of price increase was in June and it raised the prices of its cigarettes by 6 cents. Prior to that, the last price hike was implemented in December 2011.

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However, the cigarette volumes have declined consistently while cigarette revenues have remained flat in the last three years. Most of the price increases have been industry wide, so we don’t expect any significant change in Altria’s market share. Thus, we expect revenue growth for this division to remain flat, with a slight upside bias. Margins, on the other hand, have fattened due to the periodic price hikes, and we expect this trend to continue as there hasn’t been any significant change in input costs.

Aggressive Pricing for Smokeless Products

Besides cigarettes, the company has a major presence in smokeless products through its holdings of US Smokeless Tobacco Company and Philip Morris USA. It introduced its latest tobacco free product (containing nicotine) called Verve in select markets in the U.S. Unlike cigarettes, which is witnessing negative volume growth, the market for smokeless tobacco products is growing at 4% annually.

Altria’s market share in the smokeless products in the U.S. saw an increase till 2010, but the company has been more aggressive in its pricing in the last one year. Even in 2012, it raised the prices of its smokeless products by 5 cents per can. Thus, we expect a gradual decline in its market share for smokeless tobacco products, going forward. Although a stronger pricing will boost the short-term earnings, it could hamper the long-term prospects for the company for a division whose market size is experiencing positive volume growth.

Altria Group is also present in cigars and wines, but these divisions are quite small compared to cigarettes or smokeless products, so their performance will not have much impact on the top-line or bottom-line growth of the company.

We have a $32.60 price estimate for Altria, which is about 5% below the current market price. We could see some upside to this stock price if the company is able to address the following issues:

a) Slow down the rate at which its cigarette volumes are declining.

b) Maintain market share of its smokeless products.

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