What’s Expected From Altria In Its Third Quarter Results?

Altria (NYSE:MO) is set to post its third quarter earnings on October 25, wherein a 2% increase in revenues and a 19% 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 third quarter. 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. 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 $71 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 Estimating Altria’s Performance In Q3 2018 And Its Fair Price 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 has stated that it has gained approval to sell its own device in the U.S. market, and is expected to begin testing it by the end of 2018.

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 expect 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.

8. E-Cigarette Crackdown: Recently, the FDA ordered five brands – Juul, British American Tobacco’s Vuse, Altria’s MarkTen, Imperial Brands’ Blu E-cigs, and Japan Tobacco’s Logic – to submit their plans of discouraging use of their products by teens within 60 days. On the face of it, an FDA crackdown on e-cigarettes – one of Altria’s fastest growing segments – should worry investors. However, when the crackdown also targets one of its biggest competitors in the space, which controls close to three-fourths of the market, it may actually be a good thing. Just three years after its formation, Juul Labs has already reached a valuation of $15 billion, as it continues its tremendous growth in this fast increasing market. Its market share has spiked from 32% in November 2017, to 60% in April, and further to almost 73% by September. Moreover, in the year ended January 27, 2018, MarkTen garnered close to $200 million in sales. This forms a tiny fraction of the $25.6 billion total revenues Altria achieved in FY 2017. Consequently, an action by the FDA in the e-cigarette industry should not be much of a dampener on Altria’s revenues.

9. Entry Into Cannabis: The cannabis market is booming, with tremendous growth expected in the coming years. According to Canopy Growth Corporation (TSX: WEED, NYSE: CGC), the potential global opportunity is expected to exceed $200 billion by 2032. On the other hand, tobacco companies have been faced with a shrinking cigarette market. In the face of this, the fact that big tobacco companies may be looking into the cannabis space should not come as much of a surprise. According to The Globe And Mail, a deal between Altria and pot company Aphria (TSE: APH) may be in the cards, which we think may be a win-win for both.

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