Pricing Helps Lift Altria Outlook Despite Volume Declines
Altria Group (NYSE:MO) recently released its Q3 earnings and managed to deliver strong operating income despite 5% decline in cigarette shipment volume, primarily through July 2011’s list price increase. As the largest tobacco company in the U.S. with leading brands like Marlboro, its strong pricing power and product mix continue to be the key sources of value creation. Cigarettes segment contributes to more than three-fourths of Altria’s stock value. Faced with cigarettes sales volume decline, especially following the 158% increase in the federal excise tax in April 2009 that resulted in significant industry volume contraction, Altria has announced the new cost reduction program primarily focusing on cigarette-related infrastructure costs. With more than 50% retail share, Altria is the industry leader far ahead of its competitors Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI).
Marlboro’s pricing strength offsets volume decline
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In the cigarette segment, Philip Morris U.S.A.’s shipment volume declined by 5%. Nonetheless, operating income remained strong through Marlboro’s retail price increase following PM U.S.A.’s July 2011 list price increase. Despite larger price increase than its major competitive premium and discount brands, Altria’s flagship premium brand Marlboro managed to retain some of the strong share gains achieved last year. This was in line with PM U.S.A.’s stated objective in the cigarette category to maximize income growth while maintaining modest retail share momentum on Marlboro.
In the smokeless products segment, USSTC delivered strong operating margin growth driven by Copenhagen and Skoal’s higher pricing, volume and retail share growth supported by new product launches and lower SG&A costs. Adjusting for trade inventories, smokeless segment volume grew by 5% during the quarter and 4% in first 9 months of 2011.
In the Wine segment, Ste. Michelle delivered excellent financial and volume results as it continue to focus on improving its mix to higher-margin premium products.
New cost-reduction initiatives focused on Cigarettes segment
In the third quarter, Altria completed its previously announced $1 billion share repurchase program and also exceeded its goal of achieving $1.5 billion of cost reductions(2007-11). It announced a new $1 billion share repurchase program to return more cash to shareholders by 2012. It has also initiated a new cost reduction program, primarily focused on cigarette-related infrastructure costs in order to boost operating margins in the wake of industry volume contraction post the 158% increase in the federal excise tax in April 2009. Altria expects this new cost reduction program to deliver $400 million annual cost savings by the end of 2013.
We are revising our price estimate to around $31.50 price estimate for Altria, which is 15% ahead of the market price and will be reflected on our site soon.