How Much Could Altria’s Smokeless Products Division Grow Over The Next 5 Years?

+2.73%
Upside
44.51
Market
45.73
Trefis
MO: Altria Group logo
MO
Altria Group

Altria (NYSE: MO) is betting heavily on the rising demand for smokeless or heated tobacco products to drive its overall revenue and profitability in the medium term. This is evident from the company’s recent initiatives of investing significant resources in expanding its e-vapor footprint through organic as well as inorganic strategic decisions. Trefis estimates that the smokeless products division could add close to $930 million in revenue over the next five years, while also increasing its share in the company’s total revenue base. At the same time, the segment is also expected to see steady improvement in its margins.

You can view our analysis and estimates in our interactive dashboard – How Important Is The Smokeless Products Segment For Altria’s Growth? – and alter the assumptions to arrive at your own estimates for revenue and margins. In addition, here is more Consumer Staples data.

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How has Altria’s Smokeless Products’ Net Revenue Grown Over The Last 5 Years?

  • Altria has successfully been able to add about $460 million to its smokeless products’ revenue over the last 5 years.
  • The increase in revenue was primarily driven by premium pricing and partial phasing out of promotional investments and discounts.
  • Additionally, the unit volume sales of smokeless tobacco products have increased from 793 million in 2014 to 833 million in 2018, though the last two years witnessed lower volume in line with the industry’s rate of decline.
  • A lower excise rate for the segment compared to cigarettes and a gradual rise in product pricing has also contributed to historical revenue growth.

Smokeless Products Revenue Expectations

  • Smokeless products division is expected to add over $930 million in revenue over the next 5 years, more than double of what it added in the previous 5 years.
  • Higher revenue growth is likely to be driven by increasing volume and higher pricing.
  • Unit volume sales could increase from 833 million in 2018 to 990 million in 2023, as demand from millennials for heated tobacco is continuously on the rise. Additionally, the FDA approval for Philip Morris’ IQOS product is expected to open up the US market further for heated tobacco players.
  • Pricing is expected to improve as the company will continue to gradually phase out its discounts as demand and product awareness increases.
  • However, the excise burden would also rise in line with volume growth and the probability of the US increasing its excise tax on smokeless tobacco products to check their proliferation.
  • The investment in JUUL (which controls 70% of the smokeless market in the US) is also expected to lead to a boost in segment revenues.

Altria’s Total Revenue Projection

  • Altria’s total net revenue is expected to increase to $20.4 billion by FY-2023.
  • Higher revenue is likely to be driven by healthy revenue growth in the smokeless division, partially offset by lower cigarette sales, led by falling market share of its flagship Marlboro brand.

Rise In Share Of Smokeless Division’s Revenue

  • Smokeless division’s share in Altria’s total revenue has increased from 9.3% in 2014 to 10.9% in 2018.
  • We expect this trend to continue and at a faster rate than historically witnessed.
  • Segment revenue share is estimated to surpass 15% by 2023, led by rising demand for heated tobacco, gradual decrease in regulatory uncertainty, and declining global sales of combustible products like cigarettes.

Operating Margin Trends

  • Profitability of the company’s smokeless business has largely improved over the last 5 years, with operating profit margins increasing from 63.5% in 2014 to 67.2% in 2018.
  • We believe that higher revenue base and decrease in promotional offers and discounts that were provided in the initial years of the launch of its smokeless products, is likely to lead to further improvement in profitability.
  • Additionally, the rising market share of the company’s premier offering in the oral tobacco category – Copenhagen – which is a high-margin product, would also provide a boost to profits.
  • Segment operating profit margins are expected to increase to over 70% by the year 2023.

Conclusion

Per Trefis’ estimates, the smokeless division is likely to be the fastest growing segment for Altria, with the division projected to add over 930 million in revenue, and increase its revenue contribution from 10.9% to 15.1% in the next 5 years.

 

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