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Altria (MO) Up 14% in 6 Months, Gains on Low-Risk Products

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Altria Group, Inc. (MO - Free Report) has been gaining from rising popularity of low-risk tobacco alternatives. In fact, the company is focusing on expanding its presence in reduced risk products (RRPs) such as IQOS and other oral tobacco offerings. This, along with efficient pricing strategies for tobacco products have been aiding the company to stay firm amid weak cigarette sales. Shares of this tobacco giant have gained 13.7% in the past six months, almost in line with the industry’s rise of 13.6%. That said, lets discuss some of the aspects impacting the performance of this Zacks Rank #3 (Hold) company.

Efforts to Boost Low-Risk Offerings

Like many tobacco biggies, Altria is also undertaking prudent measures to expand in the low-risk tobacco products arena. 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.  Notably, IQOS is one of the leading heated-tobacco products in the industry. The FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020. Altria, through its subsidiary Philip Morris USA, Inc., is striving to make IQOS variants available across more stores in the United States,

Additionally, Altria is undertaking efforts to expand oral tobacco offerings. The company, through its subsidiary Helix Innovations, has full global ownership of on! — a popular tobacco-derived nicotine (TDN) pouch product. 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. Notably, on! was sold in more than 93,000 stores by the end of first-quarter 2021. The company is also undertaking efforts to expand in the cannabis industry. Markedly, it acquired stakes in the Canada-based cannabis company, Cronos Group.

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Strong Pricing a Big Support

Strong pricing for tobacco products has been supporting Altria’s performance despite unfavorable tax environment and declining cigarette volumes. 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 first-quarter 2021, higher pricing aided growth in revenues and adjusted operating companies income (OCI) in the oral tobacco product segment. Also, higher pricing contributed to the company’s smokeable category revenues, which was otherwise battered by weak shipment volumes.

Wrapping Up

Soft cigarette sales have continued to be a major downside for Altria, thanks to rising health consciousness. Moreover, strict regulatory norms imposed on cigarette sales and marketing policies are a hurdle. During first-quarter 2021, the company’s domestic cigarette shipment volumes declined 12% year over year. This adversely impacted revenues in the company’s smokeable category. The company expects 2021 cigarette industry volumes to be affected by factors like stay-at-home practices, purchasing patterns and the roll out of the coronavirus vaccine among others.

Amid the headwinds surrounding the cigarette category, Altria’s efforts to boost low-risk offerings look prudent. This, along with consistent gains from pricing power is likely to keep supporting the company in the forthcoming periods.

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