Altria Group (MO - Free Report) stock is up just 1.5% so far in 2019 to lag behind the tobacco market’s nearly 16% climb. Let’s see if we should expect this underperformance to continue following the release of Altria’s earnings report before the market opens on Tuesday, July 30, or might MO shares get a boost.
Altria is one of the largest tobacco products manufacturers in the world, with many divisions and offerings for a wide range of consumers. Altria operates in a number of different market segments under different brands, these include Philip Moris U.S., Copenhagen, Skoal, and John Middleton. Altria also owns a small wine business called Chateau Ste. Michelle Wine Estates, which it received as part of an acquisition. The tobacco market is currently worth about $130 billion a year.
Altria has been on a shopping spree the past year, with two equity investments and an acquisition. First, Altria announced in December 2018 that it would invest $1.8 billion in Cronos Group (CRON - Free Report) , a Canadian cannabis company with plans to expand to the U.S. once cannabis is legalized. Altria clearly wants to jump into the marijuana market as cigarette sales slow. However, it is not likely that this investment will pay off big in the near term as the U.S. is still at least a few years from nationally legal cannabis sales.
Soon after, Altria made a $12.8 billion investment in JUUL Labs for a 35% stake in the company. This may seem counter-intuitive, as JUUL is one of the largest threats to traditional tobacco sales. Yet, JUUL sees this partnership as a way to accelerate the company’s ability to convert adult cigarette smokers to e-cigarette users. Meanwhile, Altria sees this as a way to hedge against declining cigarette sales.
In June, Altria also paid $372 million for 80% ownership of Swiss tobacco company Burger Sohne. As part of the deal, Altria will distribute Burger Sohne’s oral nicotine pouch line called “on!” Burger Sohne’s product is another attempt to diversify as cigarette sales fall, since nicotine pouch sales climbed 250% in 2018 to $60 million.
The cigarette industry has been declining more quickly in the past few years, making tobacco companies like Altria very nervous. This is why many have companies have started branching out into new product areas.
Philip Moris U.S. sells Marlboro, the most popular cigarette brand in the world, which is part of the reason it maintains massive market share in the U.S. The company currently holds around 50% of the U.S. cigarettes market. However, Philip Moris held 50.9% of the market in Q2 2017 and just 50.2% by Q2 2018.
The broader cigarette market has been on the decline at a higher rate since 2017. In October of 2017, cigarette sales volume dropped 3% year-over-year, while in March 2019 sales volume dropped more than 8% year-over-year. This makes companies like Altria increasingly worried that their cigarette runways are quickly running out.
Altria’s diversification has help prevent its revenue estimates for the current quarter from dropping despite slowing cigarette sales. In fact, our Zacks Consensus Estimate calls for revenue to grow by 3.45% over Q2 last year. Estimated revenue growth for the fiscal year is low, at just 0.37% growth, but this number compared to U.S. tobacco sales decline is promising.
Earnings numbers are more attractive, especially compared to the industry. This quarter, estimates show 8.91% earnings growth, while next quarter’s estimates call for a 6.48% increase over Q3 2018.
Fiscal 2019 shows earnings estimates of $4.18 per share, constituting 4.76% growth. Next year is even more promising as analysts expect some of Altria’s investments to start turning more profit, and therefore call for 7.21% growth above our current-year projection.
Altria is also currently undervalued compared to the industry, which contains players such as Philip Morris International (PM - Free Report) , British American Tobacco (BTI - Free Report) , and Imperial Brands (IMBBY - Free Report) . Yet, since Altria’s earnings are expected to grow faster than the industry in the coming quarters, MO stock could start to trade at a premium against the Tobacco Market average. As you can see below, whenever Altria’s forward P/E drops below that of the tobacco industry, it comes back up within a quarter.
Altria looks set to continue growing despite shrinking demand for its main product. Recent investments have made it likely that Altria will be able to diversify into new, growth heavy markets and use its experience to help its partners come out on top.
Altria currently holds a Zacks Rank #3 (Hold), as earnings estimates have remained steady for the past 90 days. The firm has been a giant player in one of the original American industries since the 1985, so don’t expect it to go down without a fight. However, investors should look for surprises in the earnings report out Tuesday before the market opens, due to new investments possibly turning larger than expected profits.
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