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Altria (MO) Benefits From Pricing, Oral Tobacco Expansion

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Amid dwindling cigarette sale volumes, renowned tobacco company — Altria Group, Inc. (MO - Free Report) — manages to stay afloat on the back of prudent pricing strategies. Consumers’ rising health consciousness has compelled tobacco companies, including Altria, to explore opportunities in low-risk alternatives. Altria’s oral tobacco offering on! has been doing well. Let’s delve deeper.

Pricing Power

Strong pricing for tobacco products is supporting Altria. Though higher pricing might lead to a possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases due to the addictive quality of cigarettes. During third-quarter 2021, higher pricing supported revenues across the Smokeable, Oral Tobacco and Wine categories. Higher pricing aided adjusted operating companies income (OCI) across all the segments.

Rising Popularity Oral Tobacco Products

Altria, 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. Management continues to expand the manufacturing capacity and the commercial availability of the product. As of Sep 30, 2021, Helix expanded its U.S distribution of on! to 110,000 stores. During the third quarter, on! contributed 3% to the total oral tobacco category, up 1 percentage point sequentially. The company submitted pre-market tobacco product applications (PMTA) for the entire on! portfolio to the FDA, which is awaiting approval. Altria is also undertaking efforts to expand in the cannabis industry.

Reduced Cigarette Sales & Other Headwinds

Regulations pertaining to the manufacturing, marketing and sales of cigarettes has been a headwind for companies in the tobacco space. This includes self-critical advertisements and precautionary labels. Cigarette sales, in general, are being affected by anti-tobacco campaigns and increased consumer awareness regarding the harmful impacts of tobacco consumption. During third-quarter 2021, Altria’s domestic cigarette shipment volumes fell 12.9% year over year, mainly driven by the industry’s rate of decline and trade inventory changes.

Altria’s right to sell IQOS, a heat-not-burn device, is currently under regulatory purview. In September 2021, the International Trade Commission (“ITC”) imposed a ban on importing and issued cease-and-desist orders (CDO) on IQOS, Marlboro HeatSticks and infringing components. However, Altria disagrees with the ITC’s decision as it believes that IQOS does not infringe any of the plaintiff’s patents. The ITC’s decision is currently under a 60-day review. If the decision is not rejected post review, the CDO will take effect on Nov 29, 2021, making all IQOS and Marlboro HeatSticks products unavailable in the marketplace.

Wrapping Up

Amid headwinds surrounding cigarette sales, Altria’s efforts to expand in the oral tobacco space looks prudent. The company is expected to keep gaining from well-chalked pricing strategies. The legal entanglements related to IQOS are expected to be settled soon. Altria’s subsidiary, PM USA, is preparing to comply with the ITC’s orders and is designing contingency plans.

Efforts Undertaken by Other Tobacco Players

Philip Morris International Inc. (PM - Free Report) is acclaimed for developing leading low-risk alternatives. The company is progressing well with its business transformation, with smoke-free products generating nearly 30% of the company’s adjusted net revenues. PM is well placed toward becoming a majority smoke-free company by 2025.

Philip Morris is engaged in manufacturing IQOS. The marketing and technology sharing agreement between Altria and Philip Morris, on the sale of IQOS in the United States, was approved by the U.S. Food and Drug Administration in 2019. Although IQOS faces challenges in the United States, the product is doing well internationally. PM is also on track with plans of generating at least $1 billion in annual net revenues from the "Beyond Nicotine" products by 2025. The initiative leverages its expertise in life sciences, inhalation technology and natural ingredients among others.

Kentucky-based tobacco company — Turning Point Brands, Inc. (TPB - Free Report) — is engaged in manufacturing and marketing a wide range of products under three segments, namely Zig-Zag, Stoker's and NewGen Products. The company’s Stoker's product category has been gaining from rising same-store sales of MST. TPB has been investing to strengthen its NewGen segment, which has low-risk offerings like vaping products. Solace and Nu-X are some of the well-performing brands in this category.

Turning Point Brands submitted Premarket Tobacco Applications to the FDA for products in the vapor segment. TPB is also undertaking measures to enhance shareholders’ returns. Last month, the company expanded its existing share repurchase authorization by an additional $30.7 million.

Vector Group Ltd. (VGR - Free Report) is engaged in manufacturing and selling cigarettes in the United States. Some of the renowned cigarette brands of the company are Liggett, Pyramid and Grand Prix. VGR is also engaged in the real estate business, where it provides residential real estate brokerage, relocation, sales and marketing services.

During third-quarter 2021, Vector Group registered operating-income growth in the tobacco business. The Liggett brand continued to perform well in terms of market share. VGR is progressing well with its marketing and infrastructural growth strategies for the tobacco business.