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Altria (MO) Looks Steady on Low-Risk Products & Strong Pricing

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Amid regulatory barriers and health concerns surrounding cigarette consumption, tobacco companies such as Altria Group, Inc. (MO - Free Report) are focusing on expanding presence in low-risk products. Markedly, the company is 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. We note that shares of the company have gained 25.3% in the past three months compared with the industry’s rise of 12.8%. That said, let’s take a closer look at the factors acting as aces in the stack for this Zacks Rank #3 (Hold) company.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth in Low Risk Products Bodes Well

RRPs, known to be the next-generation tobacco products, have been gaining immense popularity owing to their less detrimental impacts on health. Consumers are increasingly inclining toward such products in a bid to quit cigarettes. Altria has been undertaking measures to expand in this arena. In this context, 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 noteworthy.  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. Markedly, 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.

Apart from this, 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 fourth-quarter 2020, 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.

 

Prudent Pricing Complements Growth

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 possible 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. In the past, prudent pricing strategies have helped the company remain afloat even when cigarette volumes have declined. Continued gains from pricing power are likely to keep supporting the company’s revenues in the forthcoming periods.

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