Will Altria Be Able To Continue With Its Growth Momentum?

by Trefis Team
Altria Group, Inc.
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Altria (NYSE:MO) is slated to release its fourth quarter and full year 2016 results on February 1, before the markets open. The company has been performing well as of late, with earnings and revenue growth recorded in the latest quarter, along with margin improvement. Moreover, with a slowdown in the litigations against tobacco companies, further growth is expected in the fourth quarter. While a flat earnings per share is expected, the growth for the year is estimated to come in at over 8%, with a 1.5% and an almost 3% growth in revenue for the quarter and full year, respectively.

MO Pre Earnings- 1 MO Pre Earnings- 2

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Key Developments In The Quarter:

  • MRTPA Application

Buoyed by an excellent performance in the third quarter, wherein the EPS grew at over 9%, and the revenues increased by 3.1%, the stock of the company has risen by 10% since the earnings announcement. Moreover, Altria, in partnership with Philip Morris, submitted a Modified Risk Tobacco Product Application (MRTPA) with the US FDA for iQOS, its heat-not-burn tobacco product on December 5, 2016. Once iQOS gets a go ahead, Altria will get exclusive rights to sell these products in the US, and since it is the first company to apply for the MRTPA claim, it would hold substantial marketing advantage over other reduced risk tobacco products, including e-cigarettes, none of which can currently make such a claim. They can, however, request approval from the FDA for this status as well, so long as they are less harmful. This has further boosted the investor confidence in the stock and spurred on its share price.

MO Stock Price

  • Acquisition Of Nat Sherman

Altria announced on January 17th that it has acquired the privately-held Sherman Group Holdings and its subsidiaries (Nat Sherman). The latter sells super-premium cigarettes and premium cigars, and will join Philip Morris USA and John Middleton as part of Altria’s smokeable products segment. This news came fresh on the heels of the Reynolds American and British American Tobacco merger. This is the latest move in a fast-consolidating tobacco market, where a small number of companies are fighting to gain market share amid a dwindling tobacco market, while at the same time attempting to develop alternatives to traditional cigarettes.

Consumers seem to be looking for more natural products in all categories, from the food they eat to the beverages they drink. This trend seems to be spilling over into the tobacco category, as the demand for natural leaf tobacco grows across both cigarettes and cigars, and is a bright spot in an overall declining category. The natural leaf tobacco is free of additives, and offers a longer and better smoking experience, according to Matt Spillane, vice president of natural sales at Nat Sherman. He further added that these cigarettes are made with only tobacco and water, providing a more authentic taste, resulting in a greater puff count per stick. These incentives are prompting consumers to pay a premium price, which these cigarettes command. Moreover, in the cigarette category overall, the premium segment saw the smallest decline in the 52-week period ended November 22, 2014. This news is even better in the natural cigarette segment, which continues to grow, including the premium options. In 2014, the convenience store industry brought in more than $997 million in sales of natural cigarettes, and estimated sales of over $1 billion in 2015. Furthermore, in the period between October 1, 2014 and January 31, 2015, sales of natural cigarettes grew more than 19%, with 47 million units sold in convenience stores, according to Nielsen.

Nat Sherman

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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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