Consumers’ growing health consciousness and shift toward reduced-risk products have driven tobacco players like Altria Group, Inc. (MO Quick QuoteMO - Free Report) to focus on smoke-free options. Going with the trend, the tobacco giant has adapted its strategy by introducing various oral tobacco, e-vapor and heated tobacco offerings.

Also, the company has been benefiting from its solid pricing power as although 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 fourth quarter of 2023, higher pricing offered aided revenues across the Smokeable Products and Oral Tobacco categories, which were otherwise hurt by lower volumes. The continuation of such trends is likely to remain an upside for Altria.

These upsides have been working well for this Zacks Rank #3 (Hold) company amid soft cigarette volumes.

Challenges on the Horizon

The overall cigarette industry has been bearing the brunt of the inflationary environment, which has affected Adult Tobacco Consumers’ (“ATC”) spending patterns. On its fourth-quarter earnings call, management stated that industry cigarette volumes tumbled by an estimated 8% last year on account of a historical rate of decline, increased use of illicit vapor products and persistent macroeconomic pressure on smokers.

Altria has been witnessing a decline in its Smokeable Product segment revenues for the past few quarters now, which has been hurting the company’s overall top line. In the fourth quarter of 2023, Altria’s net revenues fell 3.3% year over year to $5,274 million in the Smokeable Products segment due to the reduced shipment volume and increased promotional investments, partly compensated by greater pricing.

Further, domestic cigarette shipment volumes tumbled 7.6%, mainly due to the industry’s decline rate and retail share losses, partly compensated by trade inventory movements. The industry’s decline was a result of macroeconomic pressure on ATC disposable income and increases in illegitimate e-vapor products.

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Focus on Smoke-Free Options

In response to the evolving market dynamics, Altria has been taking strong steps to expand in the smoke-free arena. The company, through its subsidiary Helix Innovations, holds full global ownership of on!, a widely embraced tobacco-derived nicotine (TDN) pouch product. Management views on! as a valuable addition to the company'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.

Net revenues in the Oral Tobacco Products segment saw a 6.6% increase to $674 million in the fourth quarter of 2023, driven by enhanced pricing strategies and a reduction in promotional investments. During the quarter, reported shipment volumes of on! jumped roughly 33% year over year. The significant strategic agreement between Altria and JT Group (announced in October 2022), which comprises a joint venture for the commercialization of heated tobacco stick products in the United States, also deserves attention. 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.

Within the smoke-free category, management is exploring ways to best compete in the significant e-vapor category. In this respect, e-vapor is the largest smoke-free category — being the most successful in shifting smokers away from cigarettes. In 2023, the e-vapor category increased by around 23%. The acquisition of NJOY Holdings is noteworthy in this respect. Altria concluded the buyout of NJOY Holdings on Jun 1, 2023.

During the fourth quarter of 2023, Altria expanded the distribution of ACE to more than 70,000 stores. These stores form about 75% of the e-vapor volume and 55% of cigarette volumes sold in the U.S. multi-outlet and convenience channel.

Looking Ahead

Altria now envisions adjusted earnings per share (EPS) in the range of $5.00-$5.17, which indicates growth of 2-4.5% from $4.95 reported in the year-ago period.

Also, Altria highlighted its 2028 Enterprise Goals at its 2023 Investor Day, as part of which it targets generating mid-single-digit adjusted EPS growth through 2028 (on a compounded annual basis). MO intends to maintain its leadership position in the U.S. tobacco space. Moreover, U.S. smoke-free volumes are expected to grow by at least 35% from the 2022 level of 800 million units. Altria targets nearly doubling its smoke-free net revenues to $5 billion from the 2022 level.

Shares of MO have risen 1.2% in the past three months against the industry’s decline of 2.7%.

3 Appetizing Bets

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The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal-year sales and earnings suggests growth of 8.7% and 4.7%, respectively, from the year-ago reported numbers.

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The Zacks Consensus Estimate for Vital Farms’ current financial-year sales and earnings implies growth of 18.6% and 35.6%, respectively, from the year-ago reported numbers.

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The Zacks Consensus Estimate for Utz Brands’ current financial-year earnings calls for growth of 17.5% from the year-ago reported numbers.