California Tax Hike Drives Altria’s Sales Fall

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MO: Altria Group logo
MO
Altria Group

Altria (NYSE:MO) posted its third quarter earnings on October 26, wherein, as was expected, the earnings growth accelerated as the company moved through the second half of the year. The main driver of this earnings growth was the company’s core tobacco business, as strong pricing and reduced costs helped to offset the decline in volumes. The shipment volumes for the company fell at a higher rate than the industry’s, resulting in a market share decline. Marlboro’s dominant position in California played a huge role in this, as the $2 per pack tax hike imposed in the state prompted an exaggerated decline in volumes for Altria. The revenues for the company fell on a year-on-year basis, as the decline in the smokeable segment was only partially made up by the improvement in the smokeless segment.

We have a $71 price estimate for Altria’s stock, which is about 9% above the current market price.

Below we’ll detail the highlights of the quarter.

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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 has fallen, which drove down the total cigarette industry volume in the region.
  • Since Marlboro has an over 50% share in the state, it disproportionately affected the brand, contributing to a 0.2 percentage points decline in the national retail share.
  • These dynamics are expected to negatively impact Marlboro’s performance in the remainder 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 2016.
  • Altria has been taking a number of steps to curb the market share decline. This includes reallocating certain marketing resources and incorporating changes to the promotional activities, including in California.
  • Altria has also announced the expansion of Marlboro Black label in California and Washington state. Such efforts have been aimed at stabilizing the market share, while also maximizing income.

Innovative Products Focus

  • In e-vapor, Nu Mark’s MarkTen brand continued to grow its volume and retail share. The volumes grew by a massive 50% in the quarter, driven by expanded distribution and category growth.
  • It is currently the number two e-vapor brand in the country, with a national retail market share of ~13.5% in mainstream channels.
  • Nu Mark recently announced plans to expand the distribution of MarkTen Bold to approximately 15,000 additional stores in the fourth quarter.
  • In heated tobacco, the FDA accepted Philip Morris’ Premarket Tobacco Product application (PMTA) in August.
  • Once iQOS gets a go ahead, Altria will get exclusive rights to sell these products 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 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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