Back to top

Smokeless Unit & Pricing to Fuel Altria (MO) in Q4 Earnings?

Read MoreHide Full Article

Altria Group, Inc. (MO - Free Report) is slated to release fourth-quarter 2017 results on Feb 1. The question lingering in investors’ minds is, whether this major tobacco company will be able to deliver a positive earnings surprise in the quarter to be reported. We expect the company to gain from its efficient pricing and focus on cost-containment, though softness in its smokeable and wine segments raise concerns.

While Altria’s earnings surpassed the Zacks Consensus Estimate in the last quarter, it has a mixed record of earnings surprises over the trailing four quarters. Let’s delve deeper into all the factors and see how things are shaping up prior to this announcement.

Altria Group Price and EPS Surprise
 

Altria Group Price and EPS Surprise | Altria Group Quote

Factors at Play

Focus on expansion in the smokeless products space has been favoring Altria for some time now, helping its shares gain 13% in the past three months faring better than the industry’s 8.2% upside. Owing to a greater acceptability of such products, Altria has introduced several reduced risk tobacco products. Its flagship MarkTen and Green Smoke e-vapor products have been performing well in this category. Incidentally, MarkTen is now a leading e-vapor brand in the United States, with a retail market share of approximately 13.5% in mainstream retail channels, as highlighted in the company’s third-quarter 2017 results.




 

Encouragingly, during the second and third quarters, revenues (net of excise taxes) from the smokeless tobacco category advanced 8.6% and 4.5%, respectively. Also, total smokeless products retail share grew 1.1 percentage points to 53.8% during the third quarter. Given Altria’s impressive strides in this regard, we expect such trends to continue and favor its smokeless segment’s performance in the upcoming announcement. The consensus mark for net revenues at this unit is currently pegged at $555 million, up 6.5% from the year-ago period.

Additionally, Altria has been gaining from its strong pricing power, which have helped it deliver year-over-year bottom-line growth for over a year now. Incidentally, in the last quarter, adjusted operating companies income (OCI) increased 7.7%, while adjusted OCI margins jumped 4.5 percentage points to 52.2% in the smokeable segment — courtesy of higher pricing and lower SG&A and resolution costs. Also, reduced costs and higher pricing fueled adjusted OCI growth of 15.7% and OCI margin expansion of 6.8 percentage points to 70.3% in the smokeless category.

Industry Wide Hurdles Likely to Hurt Smokeable Unit

However, continued decline in cigarette volumes has been a hindrance for Altria’s smokeable segment for a while now. This in turn can be largely accountable to regulatory hurdles in the form of limitations on marketing, anti-smoking campaigns and higher excise duties. Apart from this, rising health consciousness among consumers has also resulted in lower cigarette consumption globally. Together, these factors have been weighing on cigarette industry volumes. As a result, shipment volumes in the smokeable segment declined 6.2%, 2.7%, 2.6% and 4.7%, respectively in the preceding four quarters. In fact, Marlboro, one of Altria’s prominent cigarette brands, suffered a 6% decline in volumes in third-quarter 2017.

These headwinds, which also remain a dampener for other tobacco players like Philip Morris (PM - Free Report) , British American Tobacco (BTI - Free Report) and Vector Group (VGR - Free Report) have been denting Altria’s cigarette retail market share. Evidently, total cigarette retail share declined by 0.6 percentage points to 50.5% in the third quarter, wherein revenues from the smokeable category slipped 1.5% year over year to $4,410 million. Also, Altria’s wine segment is not a great performer. Revenues here remained nearly flat year over year at $175 million in the third quarter. Results here were impacted by trade inventory reductions, heightened competition and sluggish growth of premium wine. Wine shipment volume was also almost flat at 2.2 million units.

Taking a look at estimates for fourth-quarter 2017, net revenues from the smokeable and wine (net of excise taxes) segments are anticipated to be roughly $5,440 million and $239 million, reflecting year-over-year declines of 0.2% and 0.4%, respectively.

Wrapping Up

Nevertheless, we believe that Altria’s favorable pricing and cost-reduction efforts should help it overcome soft volumes at its smokeable and wine categories and fuel bottom-line growth. Moreover, the smokeless unit is expected to continue performing well, which should also aid the fourth-quarter results. Aptly, the current Zacks Consensus Estimate for the quarter under review is pegged at 81 cents, which represents a 19.1% growth from the year-ago period. This estimate has remained stable over the last 30 days. Moreover, analysts polled by Zacks expect revenues of $4,793 million, up more than 20% from the year-ago quarter.

What the Zacks Model Unveils

To top it, our proven model shows that Altira is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Well, Altria possesses the right combination currently, as the Zacks Rank #3 company has Earnings ESP of +0.21%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>