Price Increases Boost Revenues For Altria In The Second Quarter

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Altria Group, Inc.
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Amid a backdrop of declining smoking rates and hence, cigarette volumes, Altria (NYSE:MO) has been able to increase its earnings year after year. In the second quarter, the tobacco giant’s smokeable products (cigarettes and cigars) volume declined by 2.7%, but this segment’s revenues after excise taxes grew by a little over 3%, driven by increases in the product price. This factor has also helped to boost the margins of the company, which improved by 96 basis points in the quarter. Its smokeless products segment, which contributed to roughly 10% of the revenues in the quarter also posted strong growth rates.

A factor that will continue to boost the earnings in the future are the significant buybacks the company has authorized. In the second quarter alone, Altria repurchased $1.05 billion worth of shares, reducing its share count by 14.4 million. This week, the Board authorized buybacks of another $1 billion, taking the total up to $4 billion, which is set to be completed by the second quarter of FY 2018.

Impact Of The California Tax Hike

  • The California cigarette market is the second largest in the nation, after Texas, and constituted roughly 7% of the US cigarette market before the tax was implemented. Thereafter, the volume contribution of the state fell to 5%, which drove down the total cigarette industry volume by approximately 4.5% in the quarter.

  • Since Marlboro has a 50% share in the state, it disproportionately affected the brand, contributing to its 0.3 percentage points decline in the national retail share.
  • These dynamics are expected to negatively impact Marlboro’s performance in the second half of the year as well.
  • Based on past experience, tax increases of this magnitude impact the most in the short term, after which the rate of volume decline slows down.
  • For the full year, the company estimates a 1% negative impact on the industry volumes resulting from the excise tax hikes, in California in April and in Pennsylvania back in August.

Innovative Products Effort

  • In e-vapor, Nu Mark’s MarkTen brand continued to grow its volume and retail share.
  • It is currently the number two e-vapor brand in the country, with a national retail market share of ~13% in mainstream channels.
  • MarkTen is now present in stores representing nearly 65% of e-vapor volume in those channels. And among stores, with MarkTen distribution through the full second quarter, the brand’s retail share was approximately 24%.
  • In heated tobacco, the FDA has begun its review of Philip Morris’ modified risk tobacco product application for iQOS in late May.
  • Once iQOS gets a go ahead, Altria will get exclusive rights to sell this product in the US.
  • According to Reuters, Philip Morris is the first company to seek US approval to market a tobacco product as being less harmful than traditional cigarettes since the new laws were introduced. And hence, logically, if they are also the first company to receive approval from the FDA, they will hold a significant marketing advantage over other reduced risk tobacco products.
  • Altria is also trying to get a favorable tax policy from the states for iQOS, in order to encourage people to shift to the less harmful  product.

See Our Complete Analysis For Altria

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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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