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Altria (MO) Hurt by Low Cigarette Sales, Inclines Toward RRPs

Zacks Equity Research

While persistently declining cigarette sales volumes are denting Altria Group, Inc.’s MO performance, the company’s strategic pricing and growth efforts in the low-risk products arena bode well. Well, such prudent initiatives are enabling this well-known tobacco player to enhance profitability and strengthen portfolio. Let’s take a closer look at some of the factors aiding the company and see if it can cushion the hurdles.

Bright Prospects in Smokeless Products

Tobacco companies are increasingly placing their bets on reduced risk products (RRPs) such as e-cigarettes that are scientific alternatives for cigarettes. Altria is making remarkable strides in this realm and has introduced several RRPs that are included in the company’s smokeless category. Its flagship MarkTen and Green Smoke e-vapor products are performing well. Also, the marketing and technology sharing agreement between Altria and Philip Morris PM, which is currently under FDA review, is expected to boost their respective businesses.

Recently, Altria acquired 35% stake in JUUL, which is renowned for advanced and highly differentiated e-vapor products. Altria plans to provide JUUL greater exposure among adult smokers by providing inserts in cigarette packs and extended logistics along with distribution support. Moreover, Altria announced the completion of investment in the Canadian cannabis company, Cronos Group Inc. CRON, a few days ago. Cannabis-infused products are increasingly being viewed as a recreational option. The deal is likely to augment Altria’s offerings in low-risk tobacco space. This will enable the company to explore growth prospects in the nascent but booming cannabis arena.

Pricing & Savings Efforts Bode Well

Strong pricing has helped the company to boost revenues. In fourth-quarter 2018, higher pricing boosted performance in the smokeable and smokeless segments. In fact, solid cigarette pricing helped cushion the impact of weak volumes in the smokeable segment. The company continues to envision product pricing to be the vital driver in revenue expansion.

Additionally, 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. Along with cost minimization across several platforms, the program is aimed to reduce workforce and third-party spending. Savings generated from the initiative will be mainly utilized for lowering interest expenses associated with the investments in JUUL and Cronos.


Declining Cigarette Sales is a Roadblock

Declining cigarette sales volumes, stemming from fading consumer enthusiasm and regulatory hurdles, have been marring Altria’s performance for a while. During fourth-quarter 2018, domestic cigarette shipment volumes fell 4.4% year over year. Prior to this, cigarette shipment volumes declined 3.7%, 10.6% and 4.2% in the third, the second and the first quarters of 2018, respectively.

Such factors have lowered investors’ optimism in the stock, which declined 6.4% in the past three months compared with the industry’s fall of 0.5%. Apart from Altria, declining cigarette sales volumes are hurting other tobacco players like Philip Morris and British American Tobacco BTI.     

Amid such a scenario, the company’s gradual expansion in other business areas, such as RRPs, is expected to offer respite to a certain extent. This combined with higher cigarette pricing strategies is likely to drive growth. Moreover, the company’s bottom-line view for 2019 is encouraging. Going ahead, we expect such upsides to aid a turnaround in this Zacks Rank #3 (Hold) company’s performance.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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