Lower MSA Fee to Boost MO's Earnings

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Tobacco manufacturer Altria Group Inc. (MO) revised its full-year reported earnings per share guidance upwards in order to reflect the reduced cost under the Master Settlement Agreement (MSA).

Altria has revised its reported earnings estimate to a range of $2.57 to $2.62 from the previously announced range of $2.51 to $2.56 after the arbitration panel presiding over the long-running dispute between the cigarette companies and the 46 U.S. states ruled in the tobacco companies’ favor.

Philip Morris USA Inc., (the subsidiary of Altria which manufactures and sells cigarettes and certain smokeless products in the United States) expects that its 2014 MSA payment obligations will be lowered by $145 million. As a result, the reported pre-tax earnings for the third quarter of 2013 are also expected to be higher by $145 million.

However, Altria, which carries a Zacks Rank #4 (Sell), reaffirmed its adjusted 2013 full-year earnings expectation in the range of $2.36 to $2.41, up 7% to 9% from the adjusted diluted earnings per share base of $2.21 in 2012.

The non-participating manufacturer adjustment (NPM Adjustment) dispute was related to the NPM adjustment provisions of the MSA. The agreement was inked between 46 states and major tobacco players including Altria, Reynolds American Inc.(RAI), Philip Morris International Inc. (PM) and Lorillard Inc.(LO). Under the agreement, the participating companies had agreed to pay tobacco-related health-care costs to these states and also abide by the restrictions on advertising, marketing and selling cigarettes imposed by the states.

The dispute arose over the amount that these tobacco companies had to pay to the state governments. The tobacco manufacturers argued that they lost market share in these states to other local cigarette makers who did not enter the agreement.

Moreover, the tobacco companies argued that at least 15 states had failed to diligently collect escrow payments from manufacturers that did not sign the 1998 agreement. This failure entitled participating manufacturers to lower payments.

The cigarette makers won against six of the 15 states. The panel ruled that those states who failed to enforce escrow payments laws would not be entitled to collect the payments from tobacco manufacturers either.

The lower MSA payment is expected to boost earnings in the coming quarter for the tobacco giants.

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