Altria’s Revenue Misses Consensus, Earnings Boosted By SABMiller Deal

by Trefis Team
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Altria Group, Inc.
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Altria (NYSE:MO) reported its fourth quarter and full year 2016 earnings on February 1, 2016, wherein it beat the EPS estimates by a penny, but missed on revenue by $70 million for the quarter. Its stake in SABMiller (now Anheuser) proved to be fruitful in the final quarter, with its reported diluted earnings per share increasing 723.4% to $5.27, as a result of the transaction gain. After excluding the impact of special items, the metric increased 1.5% to $0.68. Altria has been witnessing soft volume trends for a number of quarters, as a result of a general shift away from tobacco products. As a result of this, the company is increasingly focusing on its electronic cigarettes business to ensure growth in the long term. But despite falling smokeable segment volumes, the company has found a way to boost its profits quarter after quarter.

Altria Q4 Earnings -1 Altria Q4 Earnings -2

Financial Performance

Altria maintained its leading retail position in the fourth quarter. However, a 4.8% decline was seen in the cigarette shipment volume, primarily driven by the industry’s rate of decline, as well as a fewer shipping day. After adjusting for calendar differences, the company estimates a decline of 3.5% in the quarter for the company, which is comparable with a 3.5% decline in the industry. The national expansion of the Marlboro Menthol Slate also received positive feedback. The company also enhanced its smokeable segment by acquiring Nat Sherman, with integration already underway. The segment’s operating companies income (OCI) grew by 3.7%, driven by higher net pricing and lower cost.

Altria Q4 Earnings -3

In the smokeless products segment, while the OCI grew by 4.3% in the quarter, the OCI margins declined by 2 percentage points, due to higher manufacturing costs and promotional investments. Furthermore, the volumes in the segment grew at a faster rate that the category, along with an increase in the combined market share of Copenhagen and Skoal by 1.1 share points to 52.5%. In Wine, Ste. Michelle grew adjusted OCI by 16.4% in the quarter, with a shipment volume increase of 4.2%.

Altria Q4 Earnings -4

Earnings Guidance

Altria’s guidance of adjusted earnings for the full year to be between $3.26 and $3.32 didn’t live up to expectations. According to consensus estimates, the figure for 2017 was expected to be $3.33 per share. The guidance implies a growth of 7.5% to 9.5%, compared to 2016, but investors had hoped for it to be closer to the 10% mark.

See Our Complete Analysis For Altria

The impact of the Anheuser Busch- SABMiller deal will not show up in the company’s financials until the first quarter of 2017. A 10.2% stake in the combined company will improve the diversification of Altria’s business, and will be a significant contributor to the profits.

A development that may dampen the results for the company in 2017 is the tax hike in California, which will raise taxes by $2 to $2.87 per pack, starting in April. Since California is a high volume state, it will negatively impact the revenues for the company. Furthermore, there are also proposals in several other states to raise the excise taxes further.

iQOS Update

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. The company stated that it planned to file its pre-market tobacco product application in the first quarter of 2017. The tobacco giant also continues to make progress on its US plans for iQOS, including the implementation of a dedicated commercialization team. Altria has the benefit of working closely with Philip Morris, which will help them obtain the knowledge they have gained with the launch of the product in each new market.

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Notes:

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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