We reiterated a Neutral rating on Altria Group (MO - Analyst Report) following the fourth quarter and fiscal year 2011 earnings results.

Altria’s fourth-quarter 2011 earnings of $0.50 per share surpassed prior-year results by 13.6% as well as the Zacks Consensus Estimate by a penny. The upswing was due to strong performance of its businesses and cost reduction initiatives. The hike in earnings was contributed by higher operating income from cigarettes, smokeless products and wine.

In the fourth quarter, Altria’s total revenue increased 3.4% to $6.1 billion, as opposed to the prior-year period. It also exceeded the Zacks Consensus Estimate of $4.3 billion, owing to higher net revenues from all the reporting segments.

Further, Altria announced a cost reduction program in 2011. The new program is expected to deliver $400 million in annualized cost savings by the end of 2013. Altria estimates total pre-tax restructuring charges in connection with this new program of approximately $300 million, which is lower than its original estimate of $375 million, primarily due to lower-than-expected employee separation costs. Altria recorded 2011 fourth-quarter pre-tax charges of $224 million or $0.07 per share, with the balance to be incurred in 2012.

The company’s new collaboration with Okono A/S to develop innovative, non-combustible nicotine-containing products for adult tobacco consumers marks the company’s ability to presume the sentiments of the consumers. There has been a general shift of consumers to low risk and smokeless tobacco products. The new venture will help the company gain market share in the industry. The existing smokeless tobacco brands like Copenhagen and Skoal performed well during fiscal 2011 with rising retail share in the market. Wintergreen Pouches from Copenhagen and Skoal X-tra varieties and 2 new Skoal Snus products from Skoal boosted smokeless category’s sale during the year.

However, increased smoking restrictions in the U.S. and Europe since 2010 had a significant impact on cigarette consumption. To support the smoking ban the Food and Drug Administration (‘FDA’) has recently asked the tobacco giants of the US to print the latest design set by the council on their cigarette packets from October 2011. Moreover, governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced cigarette industry volume, and we expect these factors to continue to reduce cigarette consumption levels

Further, the FDA has also proposed a ban on menthol, in tune with the Tobacco Control Act. As per the act, menthol cigarettes have an adverse impact on public health and therefore the removal of menthol would be beneficial. The proposed ban is under review. This type of a ban will lead to serious black market for the products, which would be incredibly detrimental to all parties. We thus prefer to remain on the sidelines.