Altria Rolls Up A Solid Quarter Riding On Marlboro’s Pricing Gains

MO: Altria Group logo
Altria Group

Altria (NYSE:MO) announced its earnings for the second quarter on July 24, 2012. The company reported strong figures this quarter with adjusted earnings growth of 9.3% on a year-on-year basis. Revenues and margins were boosted by price increases of the Marlboro brand and retail share increase of the cigarettes division. The company has slightly increased its full-year earnings outlook for 2012, partly due to the strong performance of its investment in SABMiller. Key trends to consider include the price increases of premium brands and the growth of the smokeless products division.

We currently have a Trefis price estimate of $32.60, which is about 8% below the market price.

The smokeable products division, which includes both cigarettes and cigars, posted a 0.8% growth in revenues compared to Q2 2011. Revenue growth was primarily driven by the strong pricing of Marlboro cigarettes, partially offset by investment to support Marlboro’s recently modified brand architecture, and the unfavorable mix caused by volume growth of the L&M brand. Adjusted EBITDA margins grew 0.6%, largely due to Marlboro’s price increase. The cigarettes division also gained 0.8% in retail share, driven by Marlboro and L&M, which offset the impact of the continuing decline in smoking population in the US, leading to flat volume growth.

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The strategy used by the company is to drive revenue growth by strong pricing of premium brands such as Marlboro, Parliament and Virginia Slim, combined with promotion of discount brands to boost volumes. However, there is now a possibility that revenue growth from price increases may be completely offset by the unfavorable volume mix which is developing due to the growing popularity of the discount brands, such as L&M. During the recent earnings call, the CEO of Altria, Mr. Martin J. Barrington, refuted such claims, stating that although the company’s aim is to focus on the premium segment, it wants to have an offering in the discount segment as well, and is comfortable with the current volume mix. [1] The initiatives to develop Marlboro’s new brand architecture and brand-building efforts towards Marlboro Black and other brands are consistent with these statements.

The smokeless products division posted strong results with higher volume and pricing driving revenue and margin growth (y-o-y). This is in contrast to the previous quarter, in which price increases were offset by volume declines, leading to flat revenue growth. We believe the volumes this quarter were boosted mainly due to brand-building and marketing efforts. Altria’s subsidiary, Nu Mark, introduced Verve, a tobacco-free nicotine lozenge, in June. It is still too early to say how this product will be received by its target market, but we expect the smokeless products market to grow in size as consumers continue to look for alternatives to cigarettes.

Overall, results this quarter have been strong, and Altria will be looking to build on its growth in margins and retail share. There are also a number of innovations in the pipeline, related to cigarettes and smokeless products, which could result in further gains in market share and margins. However, the declining number of smokers and continued litigation against the tobacco industry continue to be long term threats.

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  1. Altria Q2 2012 Earnings Call Transcript, Seeking Alpha, 24 July 2012 []