Can Marlboro’s Dominant Position Result In Further Growth For Altria?

Altria (NYSE:MO) is set to report its third quarter earnings on October 27, 2016. According to consensus estimates, the company will report revenues of $5.11 billion and an EPS of $0.80.

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On October 10, 2016, Anheuser-Busch InBev completed its business combination with SABMiller. In connection with this, Altria received 185.1 million restructured shares of the combined company, which represents 9.6% of the economic and voting interest, and ~$5.3 billion in pre-tax cash. The addition of the stake in AB InBev enables the company to benefit from diverse income streams. The two beer companies are highly exposed to the fast growing markets of Africa, Latin America, and Asia, resulting in higher earnings and dividend growth prospects. As a result of this merger, Altria expects a pre-tax gain of approximately $13.7 billion, or $4.55 per share, a majority of which will be recorded in the fourth quarter of 2016. As a result of how the gain will be accounted for, Altria trimmed its 2016 adjusted earnings per share outlook to a range of $2.98 to $3.04, from its previous $3.01 to $3.07. The company also announced the expansion of its share buyback program, from $1 billion to $3 billion, to be completed by the end of the second quarter of 2018.

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 where 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 the California Proposition 56, which seeks to increase the excise tax from $0.87 per pack of cigarettes to $2.87. This will put pressure on companies, such as Altria, to raise the prices of their tobacco products. Thus, the fall in cigarette volumes for the company may be even higher than the 3% reported in the second quarter earnings. However, Marlboro’s dominant position in the US, wherein it has garnered 44% of the market share, and the lower price elasticity of tobacco products, makes the company less vulnerable to price increases. This will ensure that the revenue of the company can continue to increase, despite the declining volume of cigarettes sold.

Have more questions on Altria? Have a look at the links below:

• FDA Cracks Down On Online Sales Of E-Cigarettes
• Altria Q2 Earnings: Marlboro Volumes Fall, But Overall Market Share Remains Flat
• How Will Altria Perform In Q2 2016?
• Is Altria’s Growth Sustainable?
• What Can Lead To A 10% Downside In Altria’s Valuation In The Next Few Years?
• Which Is A Better Dividend Bet – Altria Or Philip Morris?
• Altria’s Stock Still Smoking Hot After The Brexit
• What Will Be Altria’s Revenue And EBITDA Breakdown In 2016?
• What Are Altria’s Strategies For Long-Term Growth?
• How Will Altria Perform In 2016?
• How Will The New FDA Ruling On E-Cigarettes Help Altria?
• What Is The State Of The Vapor Market In The U.S.?
• How Did The Different Segments Of Altria Perform In Q1 2016?
• Impressive Growth In The Smokeable Products Segment Helps Altria Beat Estimates
• How Will Altria Perform In Q1 2016?
• What Are Altria’s Strengths Driving Long-Term Growth?
• What Are Some Obstacles To Altria’s Long-Term Growth?
• How Will Altria’s Revenue And EBITDA Change In The Next 3 Years?
• How Has Altria’s Revenue And EBITDA Composition Changed In The Last 5 Years?
• Altria: Year 2015 In Review
• How Has Altria’s Shipment Volume, By Brand, Changed Over The Past 3 Years?
• How Has Altria’s Retail Share In Smokable Products And Smokeless Products Changed Over The Last Year?
• What is Altria’s Revenue And EBITDA Breakdown?
• What is Altria’s Fundamental Value Based On Expected 2016 Results?
• By What Percentage Did Altria’s Revenue & EBITDA Grow In The Last 5 Years?

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