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Altria (MO) Gains on Low-Risk Products Amid Soft Cigarette Sales

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With declining cigarette sales plaguing the tobacco industry, players in this space are striving to expand their low-risk product offerings. Markedly, low-risk tobacco alternatives, owing to their reduced detrimental impacts on health, are being widely accepted.  Altria Group, Inc. (MO - Free Report) is also gaining from growth in oral tobacco and other reduced risk products (RRPs). Moreover, prudent pricing strategies have been supporting the company’s performance.

Let’s delve deeper.

Oral Tobacco & RRPs are Aces in the Stack

Altria has undertaken noteworthy efforts to boost presence in the low-risk tobacco space. The marketing and technology sharing agreement between Altria and Philip Morris International Inc. (PM - Free Report) , pertaining to the sale of IQOS in the United States, is yielding. In fact, the U.S. Food and Drug Administration (FDA) approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020. Also, the recently-received authorization from the FDA on sales of IQOS 3 is encouraging. We note that IQOS is currently the only heat-not-burn product in the U.S. market, which has been approved by the FDA. This is a significant upside for Altria. We note that other tobacco companies such as Turning Point Brands, Inc. (TPB - Free Report) and British American Tobacco p.l.c. (BTI - Free Report) have been expanding their offerings in the low-risk tobacco space.

Apart from this, Altria (through its subsidiary Helix Innovations) holds 80% stake in certain companies of Burger Group that is engaged in the commercialization of the oral tobacco-derived nicotine pouch product — on! Notably, on! was sold in more than 56,000 stores by the end of the third quarter of 2020, up 40% from second-quarter levels. We note that Helix submitted premarket tobacco product applications (PMTA) to the FDA in May for all 35 on! SKUs. Altria is also undertaking efforts to expand in the cannabis industry. Markedly, the company acquired stakes of the Canada-based cannabis company, Cronos Group.

Gains From Pricing

Pricing power is supporting Altria’s adjusted operating income even in the face of the unfavorable tax environment and declining cigarette volumes.  During third-quarter 2020 higher pricing boosted Altria’s revenues and adjusted operating companies income (OCI) in the smokeable as well as oral tobacco product segments. Continuation of such trends is likely to aid the company’s adjusted OCI and bottom-line performance in the forthcoming periods.

Final Thoughts

We note that the company’s smokeable segment, which mainly consists of cigarettes, has been sluggish. Consumers’ rising health consciousness, stringent regulations surrounding cigarette sales and anti-tobacco campaigns have clouded cigarette sales volumes. Amid such a scenario, Altria’s moves to bolster presence in the low risk tobacco space look prudent. Markedly, shares of this Zacks Rank #3 (Hold) company have gained 8.2% in the past two months compared with the industry’s rise of 8.5%.

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