Altria’s Sales Woes Continue In The Second Quarter

Altria (NYSE:MO) posted its second quarter earnings on July 26, wherein it reported a decline in revenues and a growth in earnings. While this had been anticipated, its sales fell more than expected, resulting in a miss on consensus expectations on the metric. 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 had been a result of increasing the prices of tobacco products, as well as the growth of its smokeless and innovative products segments. However, this time, a rise in prices was not able to fully offset a fall in volume. Altria got 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. Based on the strong earnings performance in the first half, the company has raised the lower end of its guidance, with the range now being $3.94 to $4.03, from $3.90 to $4.03 earlier.

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 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 cigarette volume decline, and would ensure continued growth in the future for Altria. While PM was the first company to file for an FDA approval for its heat-not-burn device, competitor BAT stated earlier this week that it has gained approval to sell its own device in the U.S. market.

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 expanded 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 a stable market share performance in the second 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 16% in Q2, and 23% for the first half, driven by expanded distribution, while also benefiting from category growth. Nu Mark also expanded MarkTen Elite, a pod-based closed system product, to over 23,000 stores, from 6,000 in the first quarter. We expected Nu Mark to sustain its strong growth this year.

6. Share Repurchases: Altria repurchased $437 million in shares in the second quarter, reducing its share count by 7.6 million, taking the total for the first half to $950 million and 15.6 million shares, respectively. This was one of the factors that helped in the solid growth of the EPS in the quarter. The company has a little over $1 billion left in the repurchase program, which is expected to be completed by the end of Q2 2019.

7. Excise Tax Hikes: Excise tax increases in Kentucky and Ohio went into effect from July 1, hence, their impact will be felt from the third quarter onward.  The two states combined represent 5% of the cigarette industry volume in the country. However, Marlboro forms over 50% of the market shares in both, which may exacerbate Altria’s volume decline.

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