How Will The California Cigarette Tax Hike Impact Altria?

California Proposition 56 had sought to raise the cigarette tax by $2 per pack, more than tripling the tax from its current level of $0.87. It also aimed to impose similar tax hikes on other tobacco products, as well as electronic cigarettes. The revenue earned from this tax would go primarily into funding healthcare programs,  tobacco use prevention and control programs, and tobacco related research. California voters supported this proposition, voting 63% to 37% in its favor. This may be perceived to be bad news for big tobacco companies such as Altria (NYSE:MO), since the California cigarette market is the second largest in the nation, and constitutes 8% of the US cigarette market.

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However, here we’ll try and analyze its affect on Altria’s revenue. The model involves four cases:

1. Base Case wherein there is no impact on the smokable products volume sold in California.

2. 5% Case wherein the tax rise results in a 5% decline in the smokable products volume sold in California.

3. 10% Case wherein the tax rise results in a 10% decline in the smokable products volume sold in California.

4. 15% Case wherein the tax rise results in a 15% decline in the smokable products volume sold in California.

Hence, it can be seen that the tax hike will only have a marginal impact on the value of tobacco companies. Three other tobacco tax initiatives were defeated in other states, and so this hike in California may be a one-off. Since the cigarette tax hike approval, the shares of Altria have fallen over 7%. Considering the relatively small impact on the earnings of the company, the decline in the stock price seems more of an over reaction by the market. What is even more surprising is the over 10% fall in Philip Morris International‘s (NYSE:PM) stock price, given the zero exposure the company has to the US market.

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

• Altria’s Smokeable Products Segment Rebounds From Declines Seen In The Second Quarter
• BAT’s Possible Acquisition Of Reynolds To Shake Up The Tobacco Industry
• Can Marlboro’s Dominant Position Result In Further Growth For Altria?
• 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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