Why Falling Cigarette Volumes Will Not Matter So Much For Altria In The Fourth Quarter

Altria (NYSE:MO) is set to post its fourth quarter and FY 2017 results on February 1, wherein a rise in both revenue and earnings is expected. Earnings of 80 cents per share on sales of $4.8 billion have been estimated by analysts for the fourth quarter. 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 tobacco products, as well as the growth of its smokeless and innovative products segments. These trends are expected to continue in the fourth quarter, helping in improving the margins as well.  Below we’ll highlight some factors that should have an impact on the earnings report.

We have a $73 price estimate for Altria, which is slightly higher than the current market price. The charts below have been made using our new, interactive platform. You can modify the assumptions and gauge its impact on the company’s valuation and price per share metrics.

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 had a commanding 50.5% share in the cigarette market in the third quarter. This ensures that the revenue of the company can continue to increase, despite the declining volume of cigarettes sold.

Presence In E-Cigarettes And Chewable Tobacco Segments

Given the declines in the smoking rate in the US, Altria has made a concerted effort to look for growth from other alternatives, and has been able to diversify its portfolio. As a result, the share of the smokeable segment in Altria’s revenues has fallen considerably, from 91% in 2010 to 86% in 2016. On the other hand, the share of its smokeless segment has increased from just 6% in 2010 to 10% in 2016. Moreover, the margins for the smokeless segment are also higher than that for the smokeable segment.

Altria has focused on other ways of consuming tobacco, such as through e-cigarettes and chewable tobacco, with both considered to be less harmful 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 4.2% in the latest reported quarter. The company’s leading brands, Copenhagen and Skoal, each represent more than $1 billion in annual retail sales. In 2016, the company has stated that it had six of the top 10 SKUs (Stock Keeping Units) in the smokeless tobacco category. Moreover, in e-vapor, Nu Mark’s MarkTen brand has 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 13.5% in mainstream channels. While these segments contribute only a small proportion of Altria’s earnings currently, a shift towards these products in the future could help make-up for the losses from cigarette sales. A higher sell-rate of these products could also help in improving the company’s margins.

Resorting To Share Buybacks

A factor which can be expected to boost the earnings for the company is the significant buybacks the company has authorized. In the first nine months of the financial year, Altria repurchased $2.4 billion worth of shares, leaving $576 million in the program as of September 30. This buyback program is set to be completed by the end of the second quarter of FY 2018, which would result in a significant reduction in the share count, a factor that will have a positive impact on the company’s EPS.

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, the tax increase disproportionately affected the brand, contributing to its 0.5 percentage points decline in the national retail share in the third quarter. These dynamics are expected to negatively impact Marlboro’s performance in the fourth quarter as well.

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 2017 and in Pennsylvania back in August 2016. Given the share declines, the company undertook a number of steps to curb this, which includes reallocating certain marketing resources, and incorporating changes to the promotional activities, including in California. Altria 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.

See Our Complete Analysis For Altria

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

• Why It Makes Sense For Altria To Bet On The E-Cigarette Market
• How Can Altria’s Valuation Change With A New Effective Tax Rate?
• Delay In FDA’s Proposed Regulations To Help Altria
• Key Reasons Why We Are Bullish On Altria

Notes: