Altria Group, Inc. (MO Quick QuoteMO - Free Report) appears well-poised with its strong pricing power and focus on Oral Tobacco Products amid rising cost concerns and soft cigarette volumes. For 2022, the company envisions the adjusted EPS in the range of $4.81-$4.89, suggesting growth of 4.5-6% from the $4.61 recorded in 2021.

Let’s delve deeper.

Factors Backing Altria

There has been a general shift among consumers toward several reduced risk products or smoke-free products due to the 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. Management believes that on! is a worthwhile addition to Altria’s smokeless portfolio as oral TDN products are gaining popularity in the United States due to their low-risk claims.

In the third quarter of 2022, net revenues in the Oral Tobacco Products segment jumped 7% from the year-ago quarter’s level to $665 million due to greater pricing. Domestic shipment volumes in the segment went up 1.3%, mainly due to trade inventory movements, the industry’s rate of growth and calendar differences.

The reported shipment volumes of on! surged roughly 70%. Moreover, on! retail share of oral tobacco improved sequentially and reached 5.2 share points in the third quarter.

Altria has been benefiting from its strong pricing power, which has helped the company stay firm, even amid soft cigarette shipment volumes and times of higher taxes. 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.

In the third quarter of 2022, higher pricing supported revenues across the Smokeable Products and Oral Tobacco Products segments. Moreover, higher pricing aided the adjusted operating companies income in both segments. The continuation of such trends is likely to remain an upside.

Hurdles

Cost inflation and increased gas prices were a headwind in the third quarter. Wage costs also increased. The persistence of these factors remains a concern.

Management’s bottom-line view for 2022 considers 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.

In the third quarter of 2022, Altria’s net revenues fell 3.5% year over year to $6,550 million due to the lack of revenues from the wine segment, which was divested in October 2021, along with reduced revenues from the Smokeable Products segment. After deducting excise taxes, revenues were down 2.2% to $5,412 million.

In the Smokeable Products segment, net revenues dipped 1.6% year over year to $5,882 million due to the reduced shipment volume and increased promotional investments. Domestic cigarette shipment volumes were down 9.2% year over year, mainly driven by the industry’s rate of decline and retail share losses, somewhat compensated by trade inventory movements.

On adjusting for trade inventory movements and other factors, smokeable products’ domestic cigarette shipment volumes fell an estimated 8%.

The Bottom Line

We note that cigarette volumes, in general, have been affected by consumers’ rising health consciousness and increased regulatory hurdles. However, research indicates that tobacco consumers are more likely to continue buying their preferred brand despite price increases in the tobacco category compared to other categories, per management’s third-quarter earnings call.

Pricing power and strength in Oral Tobacco Products are likely to keep Altria on its growth track. Shares of this Zacks Rank #3 (Hold) company have climbed 1.5% in the past three months compared with the industry’s growth of 1%.

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