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Altria Group Inc. (MO - Analyst Report) delivered adjusted earnings of 58 cents per share in the third quarter of 2012, which was in-line with the Zacks Consensus Estimate. The results exceeded the prior-year quarter results of 56 cents by 3.6%.

The upswing in earnings came from sales growth in smokeable products, higher earnings from Altria's equity investment in SABMiller and lower shares outstanding due to buybacks.

Revenue and Margins

Altria’s total revenue went up 2.2% year over year to $6.2 billion in the third quarter 2012 on the back of strong revenue growth from smokeable products. Revenues net of excise taxes increased 3.2% to $4.5 billion for the period. Revenue exceeded the Zacks Consensus Estimate of $4.4 billion.

In the quarter, gross profit increased 1.6% to $2.48 billion compared with the prior-year quarter. Operating companies’ income shot up 3.2% year over year to $1.99 billion compared with $1.93 billion in the year-ago period on the back of an ongoing cost reduction program.

Segment Details

Smokeable Products Segment: Net revenue for the Cigarettes segment went up 2.1% year over year to $5.6 billion, primarily attributable to positive pricing and higher shipment volumes and partially offset by higher promotional investments. Revenues net of excise tax went up 3.2% to $3.9 billion.

Furthermore, adjusted operating companies’ income increased 4.3% year over year to $1.64 billion, reflecting higher pricing and cost management in the company.

Shipment volume in the quarter went up 1.1% to 34.0 billion sticks compared with the prior-year quarter, boosted by a 1.2% increase in cigarette shipment volume. This offset a decline in cigar volume.

Smokeless Products: Net revenue in Smokeless Products increased 2.6% to $437 million, fueled by higher volume and pricing. Revenues net of excise tax went up 2.5% to $408 million.

Furthermore, adjusted operating companies’ income increased 3.3% year over year to $254 million. Smokeless products’ third-quarter shipment volume went up 5.9% to 194.3 million units on the back of volume growth in Copenhagen and Skoal brands.

Wine: The segment’s net revenue surged 6.1% to $140 million in the quarter, while revenues net of excise tax went up 6.3% year over year to $145 million.

Adjusted operating companies’ income went up 8.3% to $26 million on the back of higher shipment volume, improved premium mix and higher pricing. Wine shipment volume went up 3.7%, driven by expansion in off-premise channels.

Financial Services: Reported and adjusted operating income for the financial services segment in the third quarter of 2012 declined 4.8% to $79 million.

Other Financial Update

Altria's cost reduction program for its tobacco and service company subsidiaries, which was announced in the fourth quarter of 2011, remains on track. The program is expected to deliver $400 million in annualized savings by the end of 2013.

Altria repurchased 7.7 million shares at a total cost of approximately $262 million during the third quarter of 2012.

On October 23, 2012, Altria's board authorized the expansion of the current share repurchase program from $1.0 billion to $1.5 billion. Altria has approximately $550 million remaining in the expanded program, which it expects to complete by the end of the second quarter of 2013.

In August, Altria’s board also increased its regular quarterly dividend by 7.3% to 44 cents per share.

Business Outlook

Altria reiterates its fiscal 2012 earnings guidance in the range of $2.19 to $2.23 per share, representing a growth rate of 7% to 9% from $2.05 per share in 2011.

Headquartered in Richmond, Virginia, Altria engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. Altria, which competes with Reynolds American Inc. (RAI - Analyst Report) and Lorillard, Inc. (LO - Analyst Report), currently has a Zacks #3 Rank (short-term Hold rating). For the long-term, we have a Neutral recommendation on the stock.

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