What To Expect From Altria’s Q1 2019 Results?

by Trefis Team
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Altria Group Inc (NYSE: MO) is set to announce its Q1 2019 results on April 25, 2019, followed by a conference call with analysts. We expect the company to report net revenue of $4.61 billion in Q1 2019, which marks a decline of 1.3% compared to $4.67 billion in Q1 2018. On a sequential basis, net revenue is expected to decline by 3.7%. Lower revenue is likely to be a reflection of a continuously decreasing revenue trend from smokeable products, slightly offset by higher revenue from the company’s smokeless product sales. Revenue has been increasing over a few quarters till Q3 2018 on the back of a price increase for cigarettes and cigars and increasing share of Copenhagen, a premier product in the oral tobacco category. However, revenue decreased in Q4 2018 as millennials are moving away from combustible products. Additionally, the smokeless segment also saw a decline in Q4, in line with industry trends, as total smokeless industry volume declined by almost 1.5% in 2018.

We have summarized our key expectations from the announcement in our interactive dashboard – How is Altria expected to fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Consumer Staples data.

Key Factors Affecting Earnings

A] Revenue Trends

a) Revenue From Smokeable Products

  • Altria’s revenue from smokeable products has been under pressure due to lower shipments.
  • Cigarette and cigar volumes have been decreasing over most of the recent quarters as people are moving away from combustible products.
  • In such a scenario, Altria has resorted to price increases to avoid a sharp decline in revenue.
  • We expect revenue from the segment to decline by close to 4.9% in Q1 2019.

b) Revenue From Smokeless Products

  • Revenue from the segment declined in Q4 2018 with a decline in volume in line with industry trends.
  • However, volumes have been under pressure since Q3 2018 as industry volume declined by almost 1.5% in 2018.
  • In spite of a sequential decline, on a y-o-y basis, we expect revenue to increase by close to 4.8% due to higher market share of Copenhagen, which is the premier product in the oral tobacco category.

c) Revenue from Wine

  • Though revenue is expected to decline on a sequential basis as the segment has been facing pressure from growth in craft beers, growing imports of foreign bulk wine and continued trade inventory reductions, we expect revenue to increase on a y-o-y basis to approximately $180 million due to favorable premium mix.

B] Trend in Expenses

Though sequentially we expect total expense to decrease in Q1 2019 on the back of lower SG&A cost and the absence of one-time impairment charges, on a y-o-y basis expenses are expected to increase by about 8% due to higher interest cost.

  • Interest expense: After increasing in Q2 2018, interest expense has been lower in Q3 and Q4. However, going forward, we expect interest cost to increase as the company has raised significant debt to fund its recent stake purchases in Cronos and JUUL Labs.
  • SG&A Expense: After increasing till Q3 2018, SG&A expenses decreased in Q4 2018 due to the recently announced cost reduction program, which includes third-party spending cuts and workforce reductions. Going forward, we expect SG&A cost to decrease further as the program is expected to deliver $575 million in annualized cost savings by the end of 2019.
  • Impairment charge: Impairment cost has been negligible over the quarters. However, in Q4 2018, a one-time impairment charge of $381 million was recorded related to Altria’s decision to refocus its innovative product efforts (which includes the discontinuation of production and distribution of all MarkTen and Green Smoke e-vapor products) and impairment of the Columbia Crest trademark. We expect impairment charges to be very low in Q1 2019, in line with historical trends.

C] Profitability

  • Driven by a reduction in total expenses, we expect margins to improve in the first quarter to about 29%, much higher compared to Q4 2018.
  • However, on a y-o-y basis, margin is expected to be a tad lower due to higher interest burden.

Full Year Outlook

  • For the full year, we expect gross revenue to increase by 1.9% to $25.8 billion in 2019.
  • Higher revenue is mainly to be driven by a 10.5% rise in sales of smokeless products.
  • Net income margin is expected to increase from 27.5% in 2018 to 30.5% in 2019, driven by the cost reduction program which is expected to deliver $575 million in annualized cost savings by the end of 2019.
  • Additionally, absence of a significant impairment charge (unlike 2018) is also expected to contribute to higher profitability.

 

Trefis has a price estimate of $57 per share for Altria’s stock. The company still has $345 million remaining in its $2 billion share repurchase program, which it expects to complete by the end of Q2 2019. Altria has increased its annualized dividend yield, which stood at 7.2% in January 2019. We believe that the recent acquisitions, implementation of the cost reduction program, higher dividend pay-out, and additional share repurchases during the year will support the growth in Altria’s stock price in 2019.

 

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