VALUATION HIGHLIGHTS

1. Smokeable Products constitute 77% of the Trefis price estimate for Altria Group, Inc.'s stock.
2. Smokeless Products constitute 16% of the Trefis price estimate for Altria Group, Inc.'s stock.

WHAT HAS CHANGED?

1. MO Stock vs. S&P500 Performance
   • The changes in MO stock over the recent years have been far from consistent. Returns for the stock were 24% in 2021, 4% in 2022, -4% in 2023, and 41% in 2024.
   • In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that MO underperformed the S&P in 2021 and 2023.

2. Q4 2024 Performance
   • In the fourth quarter of 2024, Altria reported net revenue of $6.0 billion, which remained flat compared to the previous year. While the volume of smokeable products decreased by 9% year-over-year and oral tobacco volume saw a slight decline of 0.4%, the company's adjusted EPS grew by 9.3% to $1.29 per share.

3. Other factors to watch out for:
   • In a strategic move towards reduced-risk products, Altria partnered with Philip Morris and submitted a Modified Risk Tobacco Product Application (MRTPA) to the U.S. FDA for iQOS, their heat-not-burn tobacco product, on December 5, 2016. Philip Morris International's application proposed that iQOS presents a lower health risk compared to traditional cigarettes. This effort culminated in early 2019 when Philip Morris received FDA authorization to market iQOS in the US with a reduced risk claim. Altria secured exclusive rights to sell iQOS in the US, giving them a significant advantage, as Philip Morris was the first to gain US approval for a tobacco product marketed as less harmful than conventional cigarettes.
   • To combat tobacco-related deaths and financial burdens, the FDA is considering limiting the nicotine content in combustible cigarettes to non-addictive levels. While some speculate that this could lead to smokers increasing their consumption to satisfy their nicotine cravings, potentially boosting Altria's cigarette volumes, research from the New England Journal of Medicine suggests otherwise. Their study indicates that smokers do not compensate by smoking more when given cigarettes with sufficiently low nicotine levels. If Altria were solely reliant on cigarette sales, this regulation could significantly impact its earnings. However, with a diversified portfolio that includes an 8% stake in Anheuser-Busch, Altria has other avenues. Although its smokeable segment currently generates the majority of its revenue, the company could strategically shift its focus towards its smokeless tobacco segment to offset potential losses from reduced cigarette sales.
   • In 2019, Altria made a significant move to diversify beyond traditional tobacco by acquiring a 45% equity stake in Cronos Group, a cannabis company, for a total investment of approximately $1.8 billion (CAD $16.25 per share). This investment occurred amidst a surge of interest in the marijuana industry, fueled by the legalization of recreational cannabis in numerous U.S. states and across Canada, as well as the increasing acceptance and use of cannabis for medicinal purposes. Reflecting the substantial market for cannabis, estimates from sources like Marijuana Business Daily indicated a total demand in the United States around $52.5 billion at that time. This strategic investment by Altria coincided with a continued decline in cigarette sales, driven by decreasing smoking rates, particularly among younger demographics. Data from the U.S. Centers for Disease Control and Prevention showed that cigarette smoking prevalence had fallen to record lows in recent years. This trend likely motivated tobacco companies like Altria to explore opportunities in the marijuana sector, which is perceived by some as potentially having lower health risks compared to smoking and appealing to a broader range of consumers.
   • In December 2018, Altria made a significant investment of $12.8 billion to acquire a 35% stake in JUUL Labs Inc. This strategic move was intended to position Altria for a future where adult smokers increasingly transition from traditional cigarettes to non-combustible alternatives like e-vapor products. However, JUUL faced substantial regulatory and legal hurdles, leading to the investment not meeting Altria's initial expectations. Consequently, in 2023, Altria divested its stake in JUUL and subsequently acquired NJOY, a manufacturer of electronic cigarettes and vaping products, for $2.75 billion. This acquisition of NJOY represents Altria's continued commitment to the non-combustible product market.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Revenue per Smokeable Product: Trefis currently forecasts an approximate 14% increase in revenue per smokeable product unit over our forecast period. This growth is projected to be enough to compensate for the ongoing decline in cigarette industry volume. However, there's a risk that the annual increase in revenue per cigarette could be less than anticipated due to limited ability for further price hikes. If the total increase in revenue per unit were only 5%, it would imply a potential downside of nearly 10% to the Trefis price estimate.

BUSINESS SUMMARY

Altria Group, Inc. (formerly known as Philip Morris Companies Inc.), remains one of the world's largest tobacco corporations and serves as the parent company to several key entities, including Philip Morris USA, U.S. Smokeless Tobacco Company Inc., John Middleton Co., and Philip Morris Capital Corporation. Historically, the company had ties to Kraft Foods (now part of Mondelez International) and was the former parent of Philip Morris International (PM), which manages its international tobacco business. In January 2009, Altria Group completed the acquisition of UST Inc., a major manufacturer of moist smokeless tobacco. Furthermore, following the combination of Anheuser-Busch InBev and SABMiller, Altria acquired a significant ownership stake in the combined entity; however, as of recent reports, Altria's stake in Anheuser-Busch InBev has decreased to approximately 8%.

Altria's tobacco operating companies boast a portfolio of well-known brands such as Marlboro, Copenhagen, Skoal, and Black & Mild. In line with a strategic shift, Altria exited the wine business with the sale of Chateau Ste. Michelle Wine Estates in 2021. More recently, in 2023, Altria significantly expanded its presence in the non-combustible sector with the acquisition of NJOY, a maker of electronic cigarette and vaping products, for $2.75 billion. This acquisition underscores Altria's ongoing efforts to diversify its portfolio beyond traditional cigarettes.

SOURCES OF VALUE

Cigarettes and cigars are the most valuable division, with about 75% contribution to Altria's value

Cigarettes and cigars are the most valuable division of Altria Group, with over 75% contribution to its stock value.

Growth in smokeless tobacco products

The smokeless tobacco market in the U.S. continues to be a growth area within the tobacco industry and is projected to expand at an estimated annual rate of approximately 5% over the coming years. Altria holds a strong position in this market, currently accounting for over 40% of the U.S. market share by sales volume, primarily driven by its leading brands Copenhagen and Skoal.

KEY TRENDS

Declining Tobacco Consumption

The volume of tobacco product sales continues to decline, primarily driven by increasing public awareness of the significant health risks associated with smoking. In the U.S., federal and state governments actively discourage tobacco consumption through substantial excise duties and various legislative measures. These include bans on smoking in public areas, stringent regulations on the advertising and marketing of tobacco products, and mandatory health warnings on packaging. Looking ahead, the volume of cigarette sales is projected to continue its downward trend, with an estimated annual decline of around 2-4% over the next five years. However, this rate can be influenced by various factors including regulatory changes and the adoption of alternative products.

High Excise Duties on Tobacco Products and Anti-Tobacco Legislation

In the United States, federal, state, and local governments levy taxes on tobacco products as a means to generate revenue and to promote public health by discouraging consumption. High excise duties contribute to higher cigarette prices, which, in turn, can deter individuals from smoking.

Governments also employ anti-tobacco legislation and anti-smoking laws to further curb tobacco and cigarette use. Measures such as bans on smoking in public places have demonstrably led to reductions in cigarette sales. The U.S. Food & Drug Administration (FDA) plays a crucial role in regulating the tobacco industry, leading to increasing restrictions on tobacco products, including limitations on ingredients. Notably, the FDA has issued a final rule to ban menthol cigarettes, which currently account for a significant portion of cigarette sales. The implementation of this ban is anticipated to have a substantial impact on the cigarette market, although the timeline for enforcement may be subject to legal challenges.

Strong Pricing Power

The majority of tobacco and cigarette companies currently operate under a "Price-Profit First" strategy, leveraging their significant pricing power to maintain and expand profit margins despite declining cigarette sales volumes. This strategy allows them to sustain revenues and profitability through price increases, effectively offsetting some of the impact of reduced consumption.

Risks from Litigation

The tobacco industry remains highly vulnerable to adverse litigation. Beyond the potential for substantial financial payouts in damages, the negative publicity generated by prominent court cases can significantly harm the demand for tobacco products. Due to its prominent position and substantial market share, Altria faces a heightened susceptibility to such litigation risks.