Altria Group: Focus on Oral Tobacco Products and Growth

US tobacco company Altria Group, Inc. (MO) appears well-prepared to tackle rising costs and weak cigarette sales by focusing on oral tobacco products, thanks to its strong pricing power. The company is expecting adjusted earnings per share between $4.81 and $4.89 in 2022, a growth of 4.5-6% compared to $4.61 in 2021.

Let's delve deeper and take a closer look.

Factors supporting Altria

Due to the serious health risks associated with smoking, consumers are turning to products with reduced risk or no smoke. Altria has been adapting to the changing market by offering a variety of oral, electronic, and heated tobacco products. Altria, through its subsidiary Helix Innovations, owns on!, a popular tobacco-derived nicotine (TDN) pouch product. Management believes that on! is worth mentioning as part of Altria's smoke-free product portfolio as oral TDN products are becoming more popular in the US due to their low-risk claims. In the third quarter of 2022, the net revenue of the oral tobacco products segment increased by 7% compared to the same period last year to $665 million due to price increases. The domestic shipment volume of this segment increased by 1.3%, mainly due to changes in trade inventory, industry growth rate, and calendar differences, with reported shipping volume soaring by about 70%. Additionally, the retail market share of oral tobacco increased compared to the previous quarter, reaching 5.2 share points in the third quarter.

Altria Group surprises with price, consensus, and earnings per share.

Tobacco giant Altria has remained strong thanks to its powerful pricing ability, even during periods of weak cigarette shipments and increased taxes. While higher prices may lead to decreased cigarette consumption, it appears that due to the addictive nature of cigarettes, smokers are willing to accept price hikes. In Q3 of 2022, higher pricing supported revenue in Altria's smokeable and oral tobacco product segments. Additionally, higher pricing helped the adjusted operating company income for both segments. This trend may continue to have room for growth.

Barrier or obstacle.

Cost inflation and rising natural gas prices were unfavorable factors in the third quarter. Additionally, wage costs increased. The continued presence of these factors remains a concern. Management's outlook for 2022 takes into account planned investments related to costs aimed at improving the digital consumer engagement system, strengthening research, development, and regulatory readiness costs for smokeless products, and supporting marketing activities for the company's smokeless products. The outlook also includes expectations for inflation in settlement agreement costs, as well as direct and indirect material costs. In the third quarter of 2022, Altria's net income decreased by 3.5% year-on-year to $6.55 billion, due to lower revenue from the wine segment divestment in October 2021 and decreased revenue from the combustible products segment. Excluding excise taxes, revenue decreased by 2.2% to $5.412 billion.

In the field of smoking products, net income decreased by 1.6% year-on-year to $5.882 billion due to decreased shipments and increased promotional investments. Domestic cigarette shipments fell by 9.2% year-on-year, primarily driven by industry decline and losses in retail market share. However, changes in trade inventory partially offset this impact. After adjusting for changes in trade inventory and other factors, estimates indicate that domestic cigarette shipments for smoking products decreased by 8%.

Bottom line

Overall, cigarette sales have been impacted by increased consumer health awareness and regulatory barriers. However, according to a third quarter earnings call with management, research suggests that despite price increases in the tobacco category compared to other categories, tobacco consumers are more likely to continue purchasing their preferred brands. Pricing power and advantages with smokeless tobacco products may keep Altria on a growth trajectory. The stock price of this third-ranked (hold) Zacks company has risen 1.5% over the past three months, compared to the industry's 1% increase.

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