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On Dec 6, 2013, we retained a Neutral recommendation on tobacco maker Altria Group Inc. (MO - Analyst Report). Our investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Reiteration?

Altria’s impressive brand portfolio of tobacco and wine products helps it to maintain a strong business momentum and generate decent profit. Altria’s quick adaptation to the changing consumer demand is the other positive. Moreover, Altria’s strong pricing power has helped it to remain afloat amid declining volumes.

Moreover, efficient cost management has helped Altria to deliver strong earnings despite tough conditions in the tobacco sector. In Oct 2013, Altria reported third quarter earnings of 65 cents per share surpassing both the Zacks Consensus Estimate and the year-ago earnings by 1.5% and 12.1%, respectively. The upswing in earnings came from higher operating income in the smokeable and smokeless products segments, lower income tax and lower outstanding shares prompted by the company’s share buyback program. 

Management reaffirmed its 2013 earnings guidance range of $2.36 to $2.41, representing an increase of 7% to 9% from $2.21 per share in 2012. This reflects the benefits of the company’s cost reduction initiatives and positive pricing.

However, Altria has been witnessing a decline in cigarette volumes since the past many quarters. The slowdown in the tobacco industry, increasing health consciousness among consumers and significantly higher prices of cigarettes has impacted volumes. Moreover, the industry deals with increased regulation on packaging (graphic warning labels) in some international markets and heightened Food and Drug Administration concerns about the effect of menthol and electronic cigarettes.

Stocks That Warrant a Look

Some better-ranked stocks in the consumer staples sector include Constellation Brand Inc. (STZ - Analyst Report), Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report) and Con Agra Foods Inc. (CAG - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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