Altria Group, Inc. (MO Quick QuoteMO - Free Report) is poised to reap the rewards of its diverse portfolio of smoke-free products and competitive pricing strategies. For the full-year 2023, the company envisions the adjusted EPS in the range of $4.89-$5.03, suggesting growth of 1-4% from the $4.84 recorded in 2022.

Also, MO’s 2028 Enterprise Goals reflect its confidence despite the challenges posed by rising costs and a decline in traditional cigarette sales. Altria targets generating mid-single-digit adjusted EPS growth through 2028 (on a compounded annual basis). Further, it plans to maintain a total adjusted OCI margin of at least 60% in the next five years.

The company intends to maintain its leadership position in the U.S. tobacco space. Altria targets nearly doubling its smoke-free net revenues to $5 billion from the 2022 level.

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Pricing Power Works

Altria's pricing power has been pivotal in maintaining its stability, even in the face of declining cigarette volumes.  While raising prices could potentially result in reduced cigarette consumption, smokers often tolerate these price hikes due to the addictive nature of cigarettes.

In the second quarter of 2023, increased pricing provided relief to revenue streams in the Smokeable Products and Oral Tobacco categories, mitigating the impact of lower sales volumes. The higher pricing strategy also positively influenced the adjusted operating company income (OCI) in both of these segments.

Smoke-Free Products Gain Traction

Consumers are increasingly gravitating toward reduced-risk products and smoke-free alternatives, driven by growing health awareness regarding the hazards of traditional cigarette smoking. Altria has proactively adapted to this shifting market by offering a range of oral tobacco, e-vapor and heated tobacco products. In the second quarter of 2023, the company's net revenues from Oral Tobacco Products increased 2.3% to $680 million.

Altria, through its subsidiary Helix Innovations, holds full global ownership of on!, a popular tobacco-derived nicotine pouch product. This product has been gaining traction in the United States, primarily due to its low-risk claims. Altria is actively expanding both its manufacturing capacity and the availability of on! in the market, resulting in notable 50% growth in shipment volumes in the second quarter.

In the realm of smoke-free alternatives, Altria is strategically positioning itself to compete effectively in the e-vapor category, which continues to dominate the smoke-free market in the United States. Altria's acquisition of NJOY Holdings in June 2023 is a noteworthy move in this context.

Will the Headwinds be Countered?

The cigarette industry as a whole is grappling with an inflationary environment that has altered the spending habits of Adult Tobacco Consumers (ATCs). As external conditions remain dynamic, Altria continues to assess economic factors like inflation, interest rates, supply-chain challenges and ATC dynamics, including purchasing patterns, the adoption of smoke-free products and disposable income.

Cigarette volumes have also taken a hit due to consumers' increasing health consciousness and a shift toward lower-risk tobacco alternatives. In the second quarter of 2023, net revenues in the Smokeable Products segment saw a significant 30.9% year-over-year decline to $5,820 million, driven by reduced shipment volumes and increased promotional investments, partially offset by higher pricing. Domestic cigarette shipment volumes fell 8.7%, primarily due to industry-wide declines and retail market share losses, partly offset by inventory movements.

This Zacks Rank #3 (Hold) stock has risen 5.5% in the past year compared with the industry's growth of 5.3%.

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