Altria (NYSE:MO) reported an impressive set of numbers for its fourth quarter results, announced on January 31. The company posted full year adjusted diluted earnings per share growth of 7.8% y-o-y, backed by strong performance from the operating companies, primarily PM USA and USSTC, coupled with higher earnings from their equity investment in SABMiller. 
PM USA Retail Share Gains Help Defy Declining Market Volume Trend
The results were unexpected in terms of industry trends. (see Altria’s Earnings Rely On Better Pricing For Smokes And Growth In Smokeless Products) Marlboro and other premium brands shipment volume for the full year was down 1.25% y-o-y, while the discount brands volume was up more than 15% as compared to the previous year. This is seen as an extension of a continuing trend in the U.S. cigarette market where higher list prices due to increasing indirect taxes have been shifting the momentum towards discount brands. However, in terms of overall cigarette shipment volume, better than expected performance from the company’s flagship brand, Marlboro, along with the discount brands, helped Altria defy the declining volume trend in the domestic market.
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PM USA’s 2012 full year adjusted domestic cigarettes shipment volume was essentially flat, which is impressive when compared against a market that declined at over 2% during the same period. This is largely due to the fact that Altria was able to expand its retail market share by 0.8%, helped by Marlboro’s brand restructuring efforts and new product launches during the year.
During 2012, PM USA repositioned Marlboro black, expanded Marlboro NXT, a part of the Marlboro black family into additional geographies and updated packaging of Marlboro 83s that is part of the Marlboro red line. We expect the positive trend to continue through 2013, as Altria is focused on its strategy to maximize earnings while maintaining Marlboro’s leadership in the market. Earlier this month, PM USA expanded distribution of Marlboro Southern Cut nationally.
Copenhagen Powers Strong Smokeless Performance
Altria’s smokeless products segment reported fourth quarter and full year growth of 7.2% and 3.9%, in net revenues respectively. Growth in net revenues was driven primarily by higher pricing and higher volume, partially offset by unfavorable mix due to growth in products introduced in recent years, at a lower price.
After adjusting for changes in trade inventories and other factors, Altria’s 2012 fourth quarter and full year domestic smokeless products shipment volume grew approximately 5%. Copenhagen stood out as the best performer for Altria in the smokeless segment, backed by strong 11% growth in shipment volume y-o-y. The brand gained significant 2.2% market share as it continued to benefit from products introduced in recent years, including the May 2012 expansion of Copenhagen Southern Blend into select geographies. As the company plans to expand Southern Blend into additional states in 2013, we expect the positive trend to continue in the first half of 2013.
Equity Earnings from SABMiller Boost Bottom Line
Altria’s 2012 earnings before tax for the full-year rose by 16% compared to 2011. However, a large percentage of this came from higher earnings from its equity investment in SABMiller, a multinational brewing and beverage company. Earnings from Altria’s equity investment in SABMiller rose 68% y-o-y to $1224 million. Exceptionally high earnings from SABMiller more than offset the impact of loss incurred by the company on early extinguishment of debt, a transaction that helped Altria improve its capital structure by replacing higher coupon debt with lower cost debt.
We will soon update our $29 price estimate for Altria, based on the fourth quarter earnings.Notes: