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Altria (MO) Down 2.6% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Altria (MO). Shares have lost about 2.6% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Altria due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Altria Q2 Earnings In Line, Smokeable Unit Aids Sales

Altria released second-quarter 2019 results. The company’s adjusted earnings of $1.10 per share were in line with the Zacks Consensus Estimate. Moreover, adjusted earnings improved 8.9% year over year, owing to increased adjusted operating companies income (“OCI”) in the smokeable and smokeless products segments, higher adjusted earnings from Altria’s equity investment in AB InBev, and lower spending as a result of the company’s decision in 2018 to refocus on its innovatve products efforts. This was partly offset by higher interest expenses.

Net revenues increased 5% year over year to $6,619 million. Higher revenues in the smokeable unit aided the top line. Revenues net of excise taxes rose 6.4% to $5,193 million. The Zacks Consensus Estimate for revenues for the quarter was pegged at $5,047 million.

Gross profit in the reported quarter improved 5.7% to $3,319 million from the prior-year quarter’s number. Notably, reported OCI increased 9.4% to 2,787 million while reported operating income improved 8.8% to $2,717 million.

Segment Details

Smokeable Products: Net revenues in the category increased 5.5% year over year to $5,853 million, owing to higher pricing. Revenues, net of excise taxes, rose 7.4% year over year to $4,464 million. Total Smokeable Products shipment volume rose 0.4% from the prior-year quarter’s number. Reported domestic cigarette shipment volumes increased 0.3% year over year due to trade inventory movements, offset by the cigarette industry’s rate of decline and retail share losses. Adjusting for the aforementioned items, domestic cigarette shipment volume declined nearly 7%. During the quarter, the company’s total cigarette retail share dipped 0.4 percentage point to 49.9%. Meanwhile, reported cigar shipment volume rose 2.6%.

Adjusted OCI in the segment improved 11% to $2,427 million, owing to better pricing and reduced costs, which includes lower tobacco and health litigation expenses. This was partly negated by increased resolution expenses, and higher impairment, exit and implementation expenses. Adjusted OCI margins improved 1.8 percentage points to 54.4%.

Smokeless Products: Net revenues in the segment improved 4% from the year-ago quarter’s figure to $602 million, driven by higher pricing and reduced promotional investments. These were partially countered by low shipment volume. Revenues, net of excise taxes, increased 4.6% to $570 million in the quarter. Domestic shipment volume for the segment declined 3.6%. Total smokeless products retail share inched up 0.2 percentage points to 53.9%.

Adjusted OCI rose 9.4% to $422 million, owing to improved pricing as well as reduced promotional investments and costs. These were partially offset by lower shipment volume. Adjusted OCI margin expanded 4.1 percentage points to 74%.

Wine: Net revenues dipped 0.6% year on year to $165 million. Notably, higher shipment volume in the reported quarter was mostly countered by unfavorable premium mix. The segment’s revenues, net of excise taxes, dropped 1.2% to $160 million. Wine shipment volume increased 2.7% to about 2 million cases. Adjusted OCI in the category declined 29.6% to $19 million as a result of higher costs and unfavorable mix. Adjusted OCI margin contracted 4.8 percentage points to 11.9%.

Financial Updates

In the second quarter, this Zacks Rank #3 (Hold) company paid dividends worth almost $1.5 billion. The company’s annualized dividend rate is currently pegged at $3.20 per share. Further, management plans to maintain a dividend payout ratio of 80% of adjusted EPS. The company repurchased 3.7 million shares for approximately $195 billion in the second quarter, marking the completion of its $2-billion share repurchase program. Following this, Altria approved new $1-billion share repurchase program on Jul 29, 2019, which is likely to be completed by the end of 2020.

Other Developments

Altria agreed to acquire 80% ownership of certain companies of Burger Söhne Holding AG (Burger Group) to commercialize on! oral nicotine pouches. Following the acquisition, Altria plans to invest about $372 million in the global business. The acquisition is likely to be completed in the second half of 2019. In December 2018, the company revealed a cost-reduction program, aimed at delivering annualized cost savings of nearly $575 million by the end of 2019. In addition to efforts pertaining to cost-minimization across several platforms, the program is aimed to reduce workforce and third-party spending. During the second quarter, the company recorded pre-tax charges of $45 million in relation to this program.

Outlook

Management reiterated its guidance for 2019, wherein it expects adjusted earnings to be $4.15-$4.27, which suggests 4-7% year-over-year growth. However, Altria now expects domestic cigarette industry volume to decline 5-6% in 2019 compared with the previously estimated decline of 4-5%. Further, the company continued to expect 2019 adjusted effective tax rate of 23.5-24.5%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

Currently, Altria has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Altria has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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