Price Hikes And Share Repurchases To Boost Altria’s Earnings

Altria (NYSE:MO) is set to post its third quarter earnings on October 26, before the markets open. A rise in both revenue and earnings is expected this time around, with earnings of 88 cents per share on sales of $5.2 billion estimated by analysts. It is not an unknown fact that the smoking rate has been falling, with the US witnessing one of the steepest declines in the world. In the face of this, a majority of the company’s growth in the past has been a result of increasing the prices of the tobacco products. This trend is expected to continue in the third quarter, helping in improving the margins as well. Below we’ll highlight some factors that may have an impact on the company’s earnings.

Dominant Position In The US

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. Altria routinely undertakes tobacco price hikes twice a year. Given the massive share that Altria has in the market, its Marlboro cigarettes can be considered even less vulnerable to price hikes. The company as a whole has a commanding 51.4% share of the cigarette market. This ensures that the revenue of the company can continue to increase, despite the declining volume of cigarettes sold.

Scope Of The Smokeless And Innovative Products Segment

On July 28, the FDA stated its plans to limit the nicotine content in “combustible cigarettes” to non-addictive levels, in order to prevent thousands of deaths and billions of financial costs related to tobacco use. This surprising move caused stocks of tobacco companies to plummet, with Altria plunging almost 20% at one point, before recovering to a 9.5% decline. The FDA’s proposal seems to be more focused on reducing the consumption of “combustible cigarettes.” Hence, the other ways of consuming tobacco, such as through e-cigarettes and chewable tobacco could be a focus for Altria going forward. While these products provide nicotine as well, they may pose less of a harm to consumers given their non-combustible method of consumption.

These are both markets in which Altria has a significant presence. Its smokeless products segment delivered a revenue increase of 8.6% in the second quarter. The company’s leading brands, Copenhagen and Skoal, each represent more than $1 billion in annual retail sales. Moreover, 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. While these segments contribute only a small portion of Altria’s earnings currently, a shift towards these products in the future could be an offset for the losses from cigarette sales. A higher sell-rate of these products could also help in improving their margins.

Resorting To Share Buybacks

Altria reaffirmed its commitment to growing its adjusted earnings between 7.5% and 9.5% in 2017, with an expectation of a stronger performance in the second half of the year. A factor which will continue to boost the earnings in the future is 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. Early in the third quarter, 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.

See Our Complete Analysis For Altria

Have more questions? Have a look at the links below:

• Price Increases Boost Revenues For Altria In The Second Quarter
• Altria’s Stock Tanks On Latest Proposal By The FDA
• Key Reasons Why We Are Bullish On Altria

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