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Altria's (MO) Q3 Earnings Surpass Estimates on Solid Pricing

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Altria Group Inc. (MO - Free Report) released third-quarter 2020 results, wherein both earnings and revenues beat the Zacks Consensus Estimate and the latter climbed year over year. Higher pricing in the smokeable products and oral tobacco product segments drove the results. Moreover, based on its year-to-date performance, among other factors, Altria narrowed its adjusted earnings per share guidance for 2020 by lifting the lower end of its previously guided range. Also, the company pulled up its guidance for reported domestic cigarette industry volumes growth.

Quarter in Detail

Adjusted earnings came in at $1.19 per share, which remained flat year over year but beat the Zacks Consensus Estimate of $1.15. Increased adjusted operating companies income (OCI) in the smokeable products segment was offset by elevated income taxes and decreased adjusted earnings from the company’s equity investment in AB InBev (BUD - Free Report) and Cronos.

Altria Group, Inc. Price, Consensus and EPS Surprise

Altria Group, Inc. Price, Consensus and EPS Surprise

Altria Group, Inc. price-consensus-eps-surprise-chart | Altria Group, Inc. Quote

Net revenues advanced 3.9% year over year to $7,123 million. Revenues, after deducting excise taxes, grew 4.9% to $5,678 million. The consensus mark was $5,521 million. Revenues were aided by increased revenues in the smokeable products segment.

Segment Details

Smokeable Products: Net revenues in the category rose 4.4% year over year to $6,313 million, courtesy of higher pricing, partly negated by increased promotional investments. Revenues, net of excise taxes, grew 5.7% year over year to $4,906 million.

Reported domestic cigarette shipment volumes dipped 0.4% year over year, mainly due to retail share losses, among other factors, partly compensated by the growth rate of the industry as well as trade inventory movements. On adjusting for trade inventory movements, smokeable products’ domestic cigarette shipment volumes fell an estimated 1%, whereas total domestic cigarette industry volumes grew 1%. Meanwhile, Altria’s reported cigar shipment volumes improved 10%.

During the quarter, total cigarette retail share declined 0.3 percentage point to 49.4%. Adjusted OCI in the segment improved 9.9% to $2,823 million owing to better pricing and lower costs, partly countered by greater promotional investments, increased resolution costs and greater tobacco and health litigation items. Adjusted OCI margin rose 2.2 percentage points to 57.5%.

Oral Tobacco Products: Net revenues in the segment improved 3.2% from the year-ago quarter to $640 million, driven by greater pricing, somewhat countered by elevated promotional investments and reduced shipment volumes. Revenues, net of excise taxes, increased 3.4% to $607 million.

Domestic shipment volumes for the segment dropped 1.1% due to calendar differences as well as retail share losses, which in turn stemmed from an increase in oral nicotine pouch sales. This was partly made up by the industry’s growth rate, among other factors. On an adjusted basis, however, oral tobacco products shipment volumes climbed an estimated 4%. Total oral tobacco products’ retail share went down 2.4 percentage points to 49.9%.

Adjusted OCI rose 4.3% to $440 million owing to improved pricing, partly offset by reduced shipment volumes. Adjusted OCI margin grew 0.6 percentage points to 72.5%.

Wine: This segment has been largely hurt by the pandemic, including reduced on-premise as well as direct-to-consumer sales. Net revenues fell 6% year on year to $157 million due to reduced shipment volumes. The segment’s revenues, net of excise taxes, declined 6.2% to $152 million. Reported wine shipment volumes dropped 3.9% to about 1.9 million cases. We note that the pandemic has hurt the company’s wine business, which is likely to remain under pressure due to the restrictions on dining and gatherings.

Adjusted OCI in the category grew 25% to $20 million, resulting from a decline in SG&A costs, partly countered by reduced shipment volumes. Adjusted OCI margin rose 3.3 percentage points to 13.2%.

Financial Updates

The company currently has an annualized dividend rate of $3.44 per share. Notably, the company maintains a long-term dividend payout ratio goal of about 80% of the adjusted EPS.

Altria ended the quarter with cash and cash equivalents of $4,123 million, long-term debt of $27,755 million and total stockholders’ equity of $3,232 million.

Other Developments & Guidance

Altria incurred pre-tax charges worth $50 million in the first nine months of 2020, related to COVID-19. These include costs related to personal protective equipment, increased pay and health screenings, among others. However, Altria noted that until now, its tobacco business has not witnessed any material disruption related to the government’s restrictions on consumer movements and business operations. Most of the retail stores where the company’s products are sold (like convenience stores) have been considered as essential businesses and remain open.

Notably, Altria has been benefiting from its non-combustible products. Incidentally, PM USA started marketing IQOS and HeatSticks as modified-risk tobacco products, as authorized by the U.S. Food and Drug Administration (FDA). Further, PM USA expects IQOS to hit certain convenience stores in Charlotte from November. With regards to on!, Helix expanded its distribution by another 16,000 stores in the third quarter. on! is available in 56,000 stores as of the end of the third quarter. This reflects a 4% increase sequentially and more than triple the count from the year-ago period. Moreover, on! has reached a retail share of 2.1 percentage points of the oral tobacco category in the nine months ended Sep 30, 2020.

The company now envisions adjusted earnings per share in the range of $4.30-$4.38, indicating growth of 2-4% from the year-ago period’s $4.21. Earlier, the bottom line was expected in a band of $4.21-$4.38, which implied 0-4% growth.

The company now anticipates the domestic cigarette industry volumes growth in a range of flat to down 1.5% for 2020. Earlier, the metric was expected to drop 2-3.5% year over year. The updated guidance is based on the better year-to-date industry trends and anticipations of continued resilience in the cigarette category. However, the company continues to assess the macroeconomic impacts of the pandemic on adult tobacco consumers (ATCs), such as disposable income, unemployment rates and buying patterns.

We note that shares of this Zacks Rank #3 (Hold) company have dropped 10.4% in the past three months compared with the industry’s decline of 7.4%.

Looking for Consumer Staple Stocks? Check These

Turning Point Brands (TPB - Free Report) has a Zacks Rank #2 (Buy) and an impressive earnings surprise record. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nu Skin (NUS - Free Report) , which also carries a Zacks Rank #2, has a long-term earnings growth rate of 6.8%.

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