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Altria (MO) Benefits From Low-Risk Products & Pricing Power

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Tobacco companies, including Altria Group, Inc. (MO - Free Report) have been focusing on expanding low-risk alternatives. These next-generation tobacco products have been gaining immense popularity owing to their less detrimental impacts on health. Consumers are increasingly taking to such products in a bid to quit cigarettes. Markedly, Altria has been gaining from growth in its oral tobacco category and other reduced risk products (RRPs). Additionally, prudent pricing strategies have been fundamental to the company’s top-line growth. Let’s take a closer look.

Low-Risk Products Faring Well  

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, has been yielding favorable results.  IQOS is one of the leading RRPs in the industry. We note that the FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020. Also, the FDA’s authorization regarding sale of IQOS 3 in the United States has been encouraging. We note that Altria, through its subsidiary Philip Morris USA, Inc., is striving to make IQOS available across more stores in the United States.  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.

Moreover, Altria has been undertaking efforts to expand oral tobacco offerings. The company, through its subsidiary Helix Innovations, holds an 80% stake in certain companies of Burger Group that is engaged in the commercialization of the oral tobacco-derived nicotine (TDN) pouch product — on! Notably, on! was sold in more than 78,000 stores by the end of the fourth quarter, up 40% from third-quarter levels. Management believes that on! is a worthwhile addition to Altria’s smokeless portfolio as oral TDN products are gaining popularity in the United States owing to their low-risk claims. The company is also making efforts to expand in the cannabis industry. Markedly, the company acquired stakes in the Canada-based cannabis company, Cronos Group.

Pricing Acts as Upside

Strong pricing for tobacco products has been a significant upside for Altria. In fact, prudent pricing strategies help compensate for the high taxes. Though higher pricing might lead to a decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. During fourth-quarter 2020, higher pricing boosted Altria’s revenues and adjusted operating companies’ income in the smokeable as well as oral tobacco product segments. This led to top-line growth of 4.9% on a year-over-year basis.

Cigarette Industry Headwinds Raise Concerns

Although Altria witnessed growth in cigarette shipment volumes during the fourth quarter, the company is apprehensive regarding sustaining the momentum. Altria expects 2021 cigarette industry volumes to be affected by factors like unemployment rates, cross-category movement, buying power, stay-at-home trends as well as the rollout of the coronavirus vaccine, among others. In general, anti-tobacco campaigns and increased consumer awareness regarding the harmful impacts of tobacco consumption have been limiting cigarette sales.

Amid such a scenario, Altria’s efforts to strengthen low-risk tobacco offerings look prudent.  Moreover, continued gains from pricing of tobacco products are likely to be an upside for this Zacks Rank #3 (Hold) company.

Shares of the company have gained 15.9% in the past three months compared with the industry’s rise of 4.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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