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It has been about a month since the last earnings report for Altria Group, Inc. MO. Shares have added about 2% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is MO due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Altria Q1 Earnings Beat Estimates, Revenues Rise Y/Y
Altria came out with first-quarter 2018 results that showed consistent strength in the bottom line. The quarterly performance also reflected improved revenues in the smokeless category. Nevertheless, lower cigarette volumes remained a drag.
Quarter in Details
Adjusted earnings of 95 cents per share surpassed the Zacks Consensus Estimate of 93 cents. Earnings also surged 30.1% year over year on the back of greater equity earnings from the company’s beer investments related to AB InBev, higher adjusted operating companies income (“OCI”) in the smokeless segments, lower outstanding shares and reduced adjusted tax rate. These positives were partially offset by reduced adjusted OCI in the smokeable unit.
Net revenues of the company inched up 0.4% year over year to $6.1 billion, driven by higher revenues in the smokeless segment, largely offset by a drop in the smokeable category. Revenues net of excise taxes improved 1.8% to $4.7 billion. The Zacks Consensus Estimate was $4.6 million.
Also, in the said period, gross profit improved 5.8% from the prior-year quarter to $2,936 million.
Smokeable: Products Segment: Net revenues in the category dropped 0.8% year over year to $5,414 million, thanks to lower volumes and increased promotional spending. These were mostly offset by higher pricing. Revenues net of excise taxes gained 0.4% year over year to $4,013 million.
Total shipment volume in the category fell 4.1% from the prior-year quarter. Also, domestic cigarette shipment volumes dropped 4.2% year over year owing to lower cigarette industry volumes and decline in retail share. This was partially compensated by favorable trade inventory movements.
The company has been witnessing declining cigarette volumes for a while now due to stringent government regulations and increased consumer awareness regarding the negative impact of tobacco.
Total cigarette retail share declined to 50.3%, representing a 0.7 percentage point slip. This was primarily due to a 0.5 share point drop in Marlboro’s retail share owing to an increase in cigarette excise tax in California.
Adjusted OCI for the segment declined 2% to $1,995 million due to lower cigarette volumes, strategic investments and higher resolution expenses. These were partially made up for by higher pricing. Additionally, adjusted OCI margins declined 1.2 percentage points to 49.7%.
Smokeless Products: Net revenues in the segment rose 12.7% from the year-ago figure to $525 million owing to voluntary recalls made in 2017 and improved pricing. Also, revenues net of excise taxes advanced 13.1% to $493 million in the quarter.
Domestic shipment volumes in the category dipped 0.1% to 195.7 million units, mainly accountable to a decline in Skoal volumes, partly compensated by improved Copenhagen volumes. However, total smokeless products retail share gained 0.1 percentage points to 53.8% in the quarter.
Adjusted OCI surged 27.3% to $340 million due to voluntary recalls and higher pricing. Further, adjusted OCI margin expanded 7.8 percentage points to 69%.
Wine: Net revenues in the wine category increased 1.4% year over year to $142 million, driven by greater shipment volumes, partially countered by unfavorable mix. The segment’s revenues, net of excise taxes, inched up 0.7% to $137 million. Wine shipment volume improved 6.1% to 1.8 million cases.
However, adjusted OCI dropped 19% to $17 million as a result of employee bonuses, partially countered by higher revenues. Adjusted OCI margin also contracted 3 percentage point to 12.4%.
Altria ended the quarter with cash and cash equivalents of $2,191 million, long-term debt of $13,033 million and total stockholders’ equity of $15,397 million as of Mar 31, 2018.
With respect to dividends, during March 2018, Altria’s board hiked its quarterly dividend rate by 6.1% to 70 cents per share. As a result, the company’s annualized dividend rate is currently pegged at $2.80 per share. Further, management is on track to maintain a payout ratio of 80% of its bottom line.
During the first quarter, Altria paid dividends worth $1.3 billion. Further, the company repurchased 8 million shares for approximately $513 million in the quarter. As of Mar 31, 2018, Altria had around $505 million remaining under its share repurchase program of $1 billion which is expected to be completed by 2018-end.
Consolidation of Manufacturing Facilities
In October 2016, Altria announced the consolidation of several of its manufacturing facilities to streamline operations and achieve greater efficiencies. During the first quarter of 2018, the company completed these plans. Such consolidation is expected to provide annualized cost savings of $50 million by 2018-end.
For 2018, management reiterated its earnings view and continues to expect adjusted earnings in the range of $3.90-$4.03, up 15% to 19% year over year. This view excludes an expected charge of about 7 cents related to tax adjustments and certain special items. Further, the company continues to expect full-year 2018 adjusted effective tax rate of 23-24%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter.
Altria Group, Inc. Price and Consensus
Altria Group, Inc. Price and Consensus | Altria Group, Inc. Quote
At this time, MO has an average Growth Score of C, though it is lagging a bit on the momentum front with a D. The stock was allocated a grade of C on the value side, putting it in the middle 20% 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.
Zacks' style scores indicate that the company's stock is suitable for value and growth investors.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. It's no surprise MO has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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