Altria (MO) Gains on Pricing Power & Smoke-Free Strength
Altria Group, Inc. MO has been navigating market uncertainties with the support of its pricing power and focus on smoke-free products. These upsides have been working well for the tobacco giant amid soft cigarette volumes.
Pricing Power
Altria has been benefiting from its strong pricing power, which has helped the company stay firm amid challenges. Though higher pricing might lead to a possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases due to the addictive quality of cigarettes.
In the fourth quarter of 2023, higher pricing aided revenues across the Smokeable Products and Oral Tobacco categories, which were otherwise hurt by lower volumes. Higher pricing also offered respite to the adjusted operating companies income (OCI) in both segments.
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Strength in Smoke-Free Products
In response to the evolving market dynamics, Altria has adapted its strategy by introducing various oral tobacco, e-vapor and heated tobacco offerings. The company, through its subsidiary Helix Innovations, holds full global ownership of on!, a widely embraced tobacco-derived nicotine (TDN) pouch product. on! is a valuable addition to the company's smoke-free product portfolio, particularly given the growing popularity of oral TDN products in the United States, where they are marketed as low-risk options.
The significant strategic agreement between Altria and JT Group (announced in October 2022), which comprises a joint venture for the commercialization of heated tobacco stick products in the United States, also deserves attention. Net revenues in the Oral Tobacco Products segment saw a 6.6% increase to $674 million in the fourth quarter of 2023, driven by enhanced pricing strategies and a reduction in promotional investments. During the quarter, reported shipment volumes of on! jumped roughly 33% year over year.
Core Challenges
The overall cigarette industry has been bearing the brunt of the inflationary environment, which has affected Adult Tobacco Consumers’ (“ATC”) spending patterns. On its fourth-quarter earnings call, management stated that industry cigarette volumes tumbled by an estimated 8% last year due to a historical rate of decline, the increased use of illicit vapor products and persistent macroeconomic pressure on smokers.
In the Smokeable Products segment, net revenues decreased 3.3% year over year to $5,274 million in the fourth quarter due to the reduced shipment volume and increased promotional investments, partly compensated by greater pricing. Domestic cigarette shipment volumes tumbled 7.6%, mainly due to the industry’s decline rate and retail share losses, partly compensated by trade inventory movements. The industry’s decline was a result of macroeconomic pressure on ATC disposable income and increases in illegitimate e-vapor products.
Wrapping Up
As the external landscape remains dynamic, Altria continues assessing economic factors like inflation, ATC dynamics (such as purchasing patterns and the adoption of smoke-free products), illegal e-vapor enforcement and regulatory developments. However, the abovementioned upsides are likely to help Altria counter the obstacles on its way.
Moreover, the company recently concluded the divestiture of a portion of its stake in Anheuser-Busch InBev SA/NA. Concurrently, MO expanded its share repurchase program. Taking these into account, the company raised its bottom-line view for 2024. Altria now envisions adjusted earnings per share (EPS) in the range of $5.00-$5.17, which indicates growth of 2-4.5% from $4.95 reported in the year-ago period.
Shares of this Zacks Rank #3 (Hold) company have rallied 10.4% in the past three months compared with the industry’s growth of 2.1%.
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