Altria’s Smokeable Products Segment Rebounds From Declines Seen In The Second Quarter
Altria (NYSE:MO) reported its third quarter results on October 27, 2016, wherein the company beat the EPS consensus estimate by $0.02, and revenue by $80 million.
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Altria delivered an excellent performance, on the back of strong income growth in the core tobacco business. Marlboro maintained its retail share near record levels, while Copenhagen, a key brand in the smokeless products segment, delivered a convincing volume and retail share growth. In the quarter, the company strengthened its balance sheet as well, by tendering for high coupon debt and refinancing it with lower coupon, longer maturity debt.
Despite difficult year-on-year comparisons, when the OCI (Operating Companies Income) grew 11% in 2015, the company’s smokeable products segment produced solid third quarter results, with an OCI growth of 4.2%. This was helped by the end of the federal tobacco quota buyout payments. Altria’s retail share was 51.4% in the third quarter, representing a one-tenth of a share point increase. The smokeless segment seems to be on track with the company’s long term aim of growing volume at the same or higher rate than the industry, while also maintaining market share. The combined Copenhagen and Skoal retail share increased by 1.2 share points in the quarter, the highest level achieved by the company. This was fueled by growth in Copenhagen, which increased its retail share by 2.7 points, due to a strong customer response to Copenhagen Mint. In e-vapor, Nu Mark continued its rollout of MarkTen XL, with necessary steps being taken to comply with new FDA regulations. Altria is also continuing to partner with Philip Morris in the heated tobacco space, and remains on track to submit a modified risk tobacco product application to the FDA by the end of the year, with a pre-market tobacco product application to be followed early next year.
Altria will also benefit from the completion of the merger between SABMiller and Anheuser-Busch InBev, and will continue to participate in the increasing global profit pool of the beer business. Altria will attain a sizable one-time gain of $4.55 per share, which will be reflected in the first quarter of 2017. The company also reaffirmed its full year guidance of between $2.98 and $3.04, which works out to a growth of 6.5% to 8.5%.
Altria faces increased pressure as a result of a decline in smoking rates in the US. The smoking rate has been on the decline since the mid 1960s, as a result of the tax hikes, ban on tobacco marketing and smoking in public places, and growing awareness among the consumers. The smoking rate has come down from 21% in 2005, to under 17% today, and is estimated to decline at a rate of 3% per annum till 2040. The US, from which Altria generates all of its revenue, has had one of the steepest declines in the prevalence of smoking. Moreover, a number of states in the US are considering raising the cigarette taxes in the coming months. One such regulation is California Proposition 56, which seeks to increase the excise tax from $0.87 per pack of cigarettes to $2.87. This will put increasing pressure on companies, such as Altria, to raise the prices of their tobacco products, which may, in turn, put added pressure on the already declining cigarette volumes.
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