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Altria (MO) Positioned Well to Navigate Complexities in 2024

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Altria Group, Inc. (MO - Free Report) has been navigating a complex landscape due to changing consumer preferences and macroeconomic uncertainties. Despite facing headwinds in its smokeable products segment, the tobacco giant has been treading well on its growth trajectory due to its strategic pricing and focus on smoke-free alternatives.

These upsides are likely to help this Zacks Rank #3 (Hold) company maintain its market position going forward as well.

Adding Leaves to the Success Story

Altria's resilience is evident in its ability to leverage strong pricing power, which has been providing some cushion against soft cigarette shipment volumes. The addictive nature of cigarettes allows the company to pass on higher prices to consumers, supporting revenues and adjusted operating income.

Recognizing the shift in consumer preferences toward reduced-risk products, Altria has diversified its portfolio with oral tobacco, e-vapor and heated tobacco offerings. The company, through its subsidiary Helix Innovations, holds full global ownership of on!, a widely embraced tobacco-derived nicotine (TDN) pouch product. Management sees on! as a valuable addition to MO’s smoke-free product portfolio, particularly given the growing popularity of oral TDN products in the United States, where they are marketed as low-risk options.

With the FDA-approved NJOY ACE product, Altria anticipates significant expansion, aiming to reach 70,000 stores by the end of 2023. This strategic move aligns with the broader industry trend of shifting smokers away from traditional cigarettes. Apart from this, the significant strategic agreement between Altria and JT Group (announced in October 2022) for the commercialization of heated tobacco stick products in the United States also deserves attention.

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Countering Hurdles

Altria's smokeable products segment has faced challenges, leading to a decline in net revenues. Factors such as reduced shipment volumes, promotional investments and the overall decline in the cigarette industry have impacted performance. Domestic cigarette shipment volumes declined year over year in the third quarter of 2023, reflecting macroeconomic pressure on Adult Tobacco Consumers’ (“ATC”) disposable income and increased competition from illegitimate e-vapor products.

As the external landscape remains dynamic, Altria continues assessing economic factors like elevated inflation, higher interest rates, global supply-chain hurdles and ATC dynamics, such as purchasing patterns, the adoption of smoke-free products and disposable income.

Wrapping Up

Altria's strategic initiatives and focus on smoke-free alternatives position it for growth amid industry challenges. Management highlighted its 2028 Enterprise Goals on its 2023 Investor Day. MO targets generating mid-single-digit adjusted EPS growth through 2028 (on a compounded annual basis). Moreover, U.S. smoke-free volumes are expected to grow by at least 35% from the 2022 level of 800 million units.

Shares of the company have increased 0.5% in the past three months compared with the industry’s growth of 3.1%.

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