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Altria (MO) Benefits From Low-Risk Products, High Pricing

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  • MO

Tobacco companies, including the well-known Altria Group, Inc. MO, are striving to expand low-risk alternatives, as consumers become more conscious regarding health and wellness. Altria has been focused on expanding its presence in the reduced risk products (RRPs) space with offerings like IQOS. Its oral tobacco offering — on! — has also been doing well. Such efforts along with efficient pricing strategies for tobacco products have been strengthening the company’s footing amid the headwinds surrounding the cigarette industry, including stringent regulatory policies.

Shares of this tobacco giant have gained 11.1% in the past six months compared with the industry’s rise of 14.3%. That said, lets discuss some of the aspects impacting the performance of this Zacks Rank #3 (Hold) company.

Low-Risk Products Gaining Prominence

RRPs, considered to be the next-generation tobacco products, have been gaining popularity owing to their less detrimental impacts on health. In fact, consumers are inclining toward RRPs to quit cigarettes. The marketing and technology sharing agreement between Altria and Philip Morris International Inc. PM, pertaining to the sale of IQOS in the United States, is noteworthy. IQOS is one of the leading heated-tobacco products in the industry. The FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020. Altria, through its subsidiary Philip Morris USA, Inc., is striving to make IQOS and its variants as well as Marlboro HeatSticks available across more stores in the United States.

Altria is also undertaking efforts to expand oral tobacco offerings. The company, through its subsidiary Helix Innovations, has full global ownership of on! — a popular tobacco-derived nicotine (TDN) pouch product. Management believes that on! is a worthwhile addition to Altria’s smokeless portfolio as oral TDN products are gaining popularity in the United States owing to their low-risk claims. During the second quarter of 2021, Helix achieved unrestricted manufacturing capacity for on! in the U.S. market. As of Jun 30, 2021, Helix expanded its distribution of on!, to 105,000 stores. The company is also undertaking efforts to expand in the cannabis industry. Markedly, it acquired stakes in the Canada-based cannabis company, Cronos Group.

The aforementioned efforts have been supporting growth in Altria’s non-combustible business. During the second quarter of 2021, revenues in the company’s Oral Tobacco products unit increased 5% from the year-ago quarter’s level. Domestic shipment volumes for the segment inched up 1.8% mainly owing to growth of on!, trade inventory movements, calendar differences and certain other factors. Continuation of such trends is likely to boost Altria’s performance in the forthcoming periods.

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Pricing Power is an Upside

Strong pricing for tobacco products has been supporting Altria’s performance. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. During second-quarter 2021, higher pricing across Smokeable and Oral Tobacco categories supported the company’s top line. Moreover, higher pricing drove growth in adjusted operating companies income (OCI) across all segments.

Wrapping Up

Altria has been facing several challenges with respect to the cigarette category. The unit is being affected by strict marketing and sales regulatory norms, anti-tobacco campaigns as well as increased consumer awareness regarding the harmful impacts of tobacco consumption. The company continues to assess the impact of factors like stay-at-home practices, purchasing patterns and the roll out of the coronavirus vaccine on adult tobacco consumers. Amid such a scenario, Altria’s efforts to boost low-risk offerings look prudent. This along with consistent gains from pricing power is likely to keep the company well placed for growth.

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