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Altria (MO) Benefits From Robust Pricing & RRP Expansion

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·5 min read
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Altria Group, Inc. MO has been benefiting from its solid pricing power, which has been aiding the company’s adjusted operating companies income (OCI) for a while now. Apart from this, the tobacco giant has been gaining on its focus on expanding in the reduced risk products (RRPs) or oral tobacco products space. These upsides have been working well for the company amid soft cigarette volumes. Let’s have a closer look.

Pricing – a Key Upside

The company’s strong pricing has helped it stay afloat amid lower cigarette volumes or elevated taxes. Though higher pricing might lead to a possible decline in cigarette consumption, smokers tend to absorb price increases due to the addictive quality of cigarettes. During the third quarter of 2021, higher pricing supported revenues across the Smokeable, Oral Tobacco and Wine categories. Moreover, higher pricing aided OCI across all segments. Continuation of such trends is likely to remain an upside for Altria.

Efforts Toward RRP Expansion

Altria has been responding to the changing market scenario by offering several oral tobacco and heated tobacco products. MO (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 due to their low-risk claims. Management continues to expand manufacturing capacity as well as commercial availability of the product. As of Sep 30, 2021, Helix expanded its U.S distribution of on! to 110,000 stores. During the third quarter, on! contributed 3% to the total oral tobacco category, up 1% sequentially. Also, Altria is undertaking efforts to expand in the cannabis industry. This is evident from the acquisition of stakes of the Canadian cannabis company, Cronos Group.

The company remains committed to the heated tobacco category and believes that it can play an important role in transitioning smokers to a smoke-free future.

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Zacks Investment Research

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Cigarette Volumes

Cigarette shipment volumes are being affected by anti-tobacco campaigns and increased consumer awareness regarding the harmful impacts of tobacco consumption. Regulatory hurdles are also a vital factor limiting the marketing of cigarettes, thereby adversely impacting its sales volume. In the third quarter of 2021, net revenues in the Smokeable Products category declined 5.4% year over year to $5,975 million due to lower shipment volumes, partially offset by higher pricing and lower promotional investments. Revenues, net of excise taxes, were down 3% year over year to $4,757 million.

Total smokeable products’ shipment volumes fell 12.9% to 24,475 million. Domestic cigarette shipment volumes were also down 12.9% year over year, mainly driven by the industry’s rate of decline and trade inventory changes. On adjusting for trade inventory movements, smokeable products’ domestic cigarette shipment volumes fell an estimated 7%.

The Bottom Line

The abovementioned upsides are likely to continue working in favor of Altria, enhancing its growth going forward. On its last earnings call, management raised the lower end of its adjusted earnings view for 2021. The guidance reflects the company’s continued confidence in its business supported by investments in the smoke-free products arena. Adjusted earnings are expected in the range of $4.58-$4.62 from $4.56-$4.62. The revised bottom line indicates growth of 5-6% from $4.36 recorded in 2020.

Shares of this Zacks Rank #3 (Hold) company have rallied 6.4% in the past six months compared with the industry’s rise of 1.2%.

Hot Consumer Staple Bets

Some better-ranked stocks are Flower Foods FLO, United Natural Foods UNFI and The Hain Celestial HAIN.

Flower Foods, the producer of packaged bakery foods in the United States, currently sports a Zacks Rank #1 (Strong Buy). Shares of Flower Foods have increased 17.3% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Flower Foods’ 2022 sales suggests growth of 1.9% from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of 15.4%, on average.

United Natural Foods, the leading distributor of natural, organic, and specialty food and non-food products in the United States and Canada, carries a Zacks Rank #2 (Buy) at present. Shares of United Natural Foods have moved up 31.8% in the past six months.

The Zacks Consensus Estimate for United Natural Foods’ current financial-year earnings per share (EPS) suggests growth of 7.7% from the year-ago reported number. UNFI has a trailing four-quarter earnings surprise of 35.4%, on average.

The Hain Celestial, which provides various natural and organic foods as well as personal care products in North America and Europe, carries a Zacks Rank #2 at present. It has a trailing four-quarter earnings surprise of 9.7%, on average. Shares of The Hain Celestial have moved up 3.4% in the past six months.

The Zacks Consensus Estimate for HAlN’s current financial-year EPS suggests growth of 14.5% from the year-ago period’s reported number.


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