Can Altria’s Second Quarter Performance Result In A Rise In the Stock Price?

Altria (NYSE:MO) is set to post its second quarter earnings on July 26, wherein a decline in revenues and a growth in earnings is expected. It is not an unknown fact that the smoking rate has been falling, with the U.S. witnessing one of the steepest declines in the world. In the face of this, a majority of the company’s revenue 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 second quarter, however, this time a rise in prices may not be able to fully offset a fall in volume. Altria is expected to get a boost to its earnings as a result of the overhaul of the corporate tax code, which reduced the tax rate from 35% to 21%, effective January 1, 2018. Altria’s stock is down over 20% this year, as a result of a miss in revenue expectation in the fourth quarter of 2017, a substantial drop in volume in Q1 2018, and certain decisions by the FDA. First, the FDA announced it was working on a policy framework to lower the nicotine levels in cigarettes. A few days later, the administration stated it was considering policies to restrict the use of flavors, including menthol, strawberry, and chocolate, in tobacco products in a bid to prevent young people from getting addicted to nicotine. Consequently, after the negative stock reaction to these events, we feel the company’s stock is now undervalued. A better performance in Q2 may help to turn the tide in favor of the tobacco giant.

We have a $78 price estimate for Altria, which is significantly higher than the current market price. The charts have been made using our new, interactive platform. You can click here for our interactive dashboard on Altria’s second quarter’s expected performance to modify the assumptions and gauge the impact on the company’s revenue, earnings, and price per share metrics.

Factors That May Influence Performance Going Forward

1. iQOS Launch: Philip Morris, together with Altria, is in the process of gaining FDA approval to start selling its heat-not-burn tobacco device called iQOS with a reduced risk claim in the US. With a product like iQOS in its portfolio, it would be a game-changer for the company, given the continued cigarette volume decline, and would ensure continued growth in the future for Altria.

2. Marlboro Ice Expansion: In the first quarter, the company expanded Marlboro Ice nationally, a product that would appeal to adult menthol smokers. After only eight weeks, Marlboro Ice was being sold in about 130,000 retail stores and is noted to have very high re-order rates. Given the substantial promotion Altria has been undertaking for this product, it may help to stabilize the Marlboro market share going forward.

3. Potential of Nat Sherman: This product is part of the super-premium tobacco segment, and has a “competitive share” of the market. Altria has plans to expand the brand into 13 additional states across the western U.S., and this should lead to higher volumes.

4. Smokeless Segment Growth: Copenhagen maintained its growth and market share improvement in the first quarter. However, Altria’s other big smokeless brand – Skoal – witnessed a market share decline, as the company continued its focus on growing Copenhagen while honing its investments into Skoal to enhance profitability. Keeping this focus in mind, the company expanded Copenhagen Southern Blend into 13 states across the western U.S. in the first quarter. In March, Altria also submitted a modified risk tobacco product application for Copenhagen Snuff.

5. Innovative Products: In e-vapor, Nu Mark grew volume by approximately 30% in Q1, driven by expanded distribution, while also benefiting from category growth. Nu Mark also expanded MarkTen Elite, a pod-based closed system product, to over 6,000 stores in the first quarter. We expected Nu Mark to sustain its strong growth this year.

6. Share Repurchases: Altria repurchased $513 million in shares in the first quarter, reducing its share count by eight million. This was one of the factors that helped in the solid growth of the EPS in the quarter. The company has approximately $500 million remaining in the current $1 billion repurchase program, which is expected to be completed by the end of the year.

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