Back to top

Image: Bigstock

Altria (MO) Benefits From Pricing Power, Hurt by Low Volumes

Read MoreHide Full Article

Altria Group, Inc. (MO - Free Report) has been benefiting from its strong pricing power, which supported the company amid soft volumes and high costs in the second quarter of 2022. The tobacco giant’s focus on reduced-risk products, especially oral tobacco products, also bodes well. However, e-vapor volumes have been low, with the category still in its early stages, given limited authorizations.

Let’s delve deeper.

Solid Pricing & Focus on Oral Tobacco Products

Though higher pricing might lead to a possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive nature of cigarettes. In the second quarter of 2022, higher pricing supported revenues across the smokeable products and oral tobacco categories, which were otherwise hurt by lower volumes. Moreover, higher pricing aided the adjusted operating companies income (OCI) in both segments. The continuation of such trends is likely to remain an upside for Altria.

There has been a general shift among consumers toward several reduced-risk products (RRPs) or smoke-free products due to serious health hazards of smoking cigarettes. Altria has been responding to the changing market scenario by offering several oral tobacco, e-vapor and heated tobacco products. Altria (through its subsidiary Helix Innovations) has full global ownership of on! — a popular tobacco-derived nicotine (TDN) pouch product.

Encouragingly, 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 as well as the commercial availability of the product. In the second quarter of 2022, reported shipment volumes of on! surged roughly 60%, whereas its retail share of oral tobacco improved sequentially and reached 4.9 share points.

Apart from this, Altria is undertaking efforts to expand in the cannabis industry. This is evident from the acquisition of stakes of the Canadian cannabis company, Cronos Group. The company remains committed to the heated tobacco category and believes that it can play an important role in transitioning smokers to a smoke-free future.

Zacks Investment Research
Image Source: Zacks Investment Research

Soft Overall Volumes & High Costs

In second-quarter 2022, Altria’s net revenues fell 5.7% year over year to $6,543 million. The decline was due to a lack of revenues from the wine segment, which was divested in October 2021, along with reduced revenues from smokeable products and oral tobacco products. After deducting excise taxes, revenues were down 4.3% to $5,374 million. Revenues in both segments were hurt by reduced shipment volumes, stemming from trade inventory movements, retail share losses and the industry’s rate of decline.

Domestic cigarette shipment volumes were down 11.1% in the smokeable products segment. Altria’s reported cigar shipment volumes declined 5%. Domestic shipment volumes in the oral tobacco products segment decreased 4.4%. Retail share losses and the industry’s decline rate in the segment were hurt by macroeconomic pressures on the disposable income of adult tobacco consumers or ATC.

Apart from this, Altria continued to witness elevated inflation rates in the second quarter due to rising global energy, commodity and food prices, which were worsened by factors like demand-supply imbalances, labor shortage and the Russia-Ukraine war. Moreover, the company continued to see volatility in domestic and global economies as well as hurdles in the supply and distribution channels stemming from the pandemic and the Russia-Ukraine war. This impacted availability and the cost of certain raw materials for Altria.

Management’s bottom-line view for 2022 takes into account planned investments associated with costs to improve the digital consumer engagement system, enhanced smoke-free product research, development and regulatory preparation expenses, and marketplace activities to support the company’s smoke-free products. The view also includes anticipation of the inflation of Master Settlement Agreement expenses, and direct and indirect material costs. The company’s shares have tumbled 7.3% in the past three months compared with the industry’s decline of 6.3%.

Wrapping Up

Altria’s tobacco business has not witnessed any material disruption due to the COVID-19 pandemic. Most of the retail stores where the company’s products are sold (like convenience stores) have been considered essential businesses and have remained open. In fact, on its second-quarter earnings call, management stated that going by research, tobacco consumers are more likely to continue buying their preferred brand, despite price increases in the tobacco category as compared to the other categories.

For 2022, the Zacks Rank #3 (Hold) company envisions an adjusted earnings view in the range of $4.79-$4.93 per share. The bottom line indicates growth of 4% to 7% from $4.61 recorded in 2021.

Consumer Staple Stocks Worth a Look

Some better-ranked stocks from the sector are The Chef's Warehouse (CHEF - Free Report) , Lancaster Colony (LANC - Free Report) and J. M. Smucker (SJM - Free Report) .

Chef’s Warehouse, a distributor of specialty food products in the United States, currently sports a Zacks Rank #1 (Strong Buy). CHEF has a trailing four-quarter earnings surprise of 355.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Chef’s Warehouse’s current financial-year sales suggests growth of 40.7% from the year-ago reported number.

Lancaster Colony, which manufactures and markets food products for the retail and foodservice markets, currently sports a Zacks Rank of 1. LANC delivered an earnings surprise of 170% in the last reported quarter.

The Zacks Consensus Estimate for Lancaster Colony’s current financial-year sales and EPS suggests growth of 9.6% and 38.3%, respectively, from the corresponding year-ago reported figures.

J. M. Smucker, which manufactures and markets branded food and beverage products, carries a Zacks Rank #2 (Buy) at present. J. M. Smucker has a trailing four-quarter earnings surprise of 20.8%, on average.

The Zacks Consensus Estimate for SJM’s current financial-year sales suggests growth of 4.4% from the year-ago reported figure.

Published in