Price Hikes To Boost Altria’s Revenue In The First Quarter

by Trefis Team
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Altria (NYSE:MO) is slated to post its first quarter earnings on May 2, 2017, before the markets open. A rise in both revenue and earnings is expected this time around, with sales of $4.64 billion on earnings of 74 cents per share estimated by analysts. In the preceding quarter, while the company was able to deliver a surprise on the earnings, beating expectations by 1.5%, it missed out on revenue, which was relatively flat year-on-year. It is not an unknown fact that the smoking rate has been falling, with the region witnessing one of the most steep declines in the world. In the face of this, the majority of the company’s growth in the past has been a result of increasing the prices of the tobacco products, as well as growth in its smokeless segment. This trend is expected to continue in the first quarter, as well. Below we’ll highlight some factors that may have an impact on the company’s earnings.

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Price Hike In The Face Of Higher Taxes

Cigarette manufacturer Altria announced an increase of $0.08 per pack beginning on March 19. While tobacco companies regularly update their prices upwards, what is more surprising this time around is the timing of this hike. Normally Altria undertakes price raises twice a year, in May and in November. This has been driven by the higher excise taxes in California, put into action on April 1, which raised the cigarette tax by $2 per pack, more than tripling the tax from its current level of $0.87. This may be perceived to be bad news for big tobacco companies such as Altria, since the California cigarette market is the second largest in the nation, after Texas, and constitutes 8% of the US cigarette market. However, in an earlier article, we assessed that this hike would have a marginal impact on Altria’s revenue. The California initiative, coupled with the excise tax hike in Pennsylvania last August, is expected to reduce industry volumes by 1% this year. Three other tobacco tax initiatives were defeated in other states, and so this hike in California may be a one-off.

Altria’s Marlboro brand is the number one brand in the US, and has a 44% share in the country’s tobacco market. The addictive nature of cigarettes not only builds a high level of brand loyalty among customers, but it also makes the products less price elastic. Given the massive share that Altria has in the market, its Marlboro cigarettes can be considered even less vulnerable to price hikes. This ensures that the revenue of the company can continue to increase, despite the declining volume of cigarettes sold.

Marlboro Share

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.

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.

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. Moreover, according to Spillane, natural brands boast a 30% higher profit margin compared to premium brands, with Nielsen showing over ten consecutive years of increasing sales of this segment.

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