Yahoo Finance Altria (MO) Up 11% in 3 Months: Is There More Room for Growth?
Altria Group, Inc. MO stands firm in the tobacco space, with its shares up 10.9% in the past three months compared with the industry’s growth of 9.7%. The stock has also outdone the Zacks Consumer Staples sector and the S&P 500’s respective gains of 0.5% and 6.8% in the same time frame.
The tobacco giant has been benefiting from its focus on expanding smoke-free alternatives, given consumers’ growing inclination toward reduced-risk products (RRPs). Also, strong pricing power has been working well.
Factors Behind the Upside
A focus on introducing various oral tobacco, e-vapor and heated tobacco offerings in response to the evolving market dynamics has been a key driving factor. Incidentally, consumers are increasingly gravitating toward RRPs or smoke-free alternatives due to the well-documented health risks associated with traditional cigarette smoking.
Through its subsidiary Helix Innovations, Altria fully owns on!, a popular tobacco-derived nicotine (TDN) pouch product. on! is a significant addition to Altria's smoke-free lineup, especially as oral TDN products gain traction in the United States, where they are marketed as low-risk alternatives.
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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. Within the smoke-free category, Altria is exploring ways to best compete in the significant e-vapor category — being extremely successful in shifting smokers away from cigarettes. The acquisition of NJOY Holdings (June 2023) is noteworthy in this respect.
Net revenues in the Oral Tobacco Products segment saw a 3.7% increase to $651 million in the first quarter of 2024, driven by enhanced pricing strategies and a reduction in promotional investments. During the quarter, reported shipment volumes of on! jumped 32%. Speaking of pricing, Altria's robust pricing strategy has been crucial in maintaining stability amid industry challenges. While elevated prices may potentially discourage cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes.
In the first quarter of 2024, higher pricing offered aided revenues across the Smokeable Products and Oral Tobacco categories, which were otherwise hurt by lower volumes. Higher pricing also offered respite to the adjusted operating companies income (OCI) in both segments.
Low Cigarette Volumes
The overall cigarette industry has been bearing the brunt of the inflationary environment, which has affected Adult Tobacco Consumers’ (“ATC”) spending patterns. 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 first quarter of 2023, Altria’s net revenues fell 2.5% year over year to $5,576 million, mainly due to reduced net revenues in the smokeable product unit.
In the Smokeable Products segment, net revenues decreased 3.6% year over year to $4,906 million, mainly due to reduced shipment volume and increased promotional investments, partly compensated by greater pricing. Domestic cigarette shipment volumes tumbled 10% due to the industry’s decline rate and retail share losses. The industry’s decline was a result of macroeconomic pressure on ATC’s disposable income and increases in illegitimate e-vapor products.
Looking Ahead
Despite the hurdles, Altria’s focus on a smoke-free journey and efficient pricing are likely to help it keep its growth story going. For 2024, this Zacks Rank #3 (Hold) company envisions the adjusted EPS in the range of $5.05-$5.17. The guidance indicates growth of 2-4.5% from the $4.95 recorded in 2023. Management expects the bottom-line growth to be skewed toward the second half of 2024 due to the timing of the NJOY acquisition in 2023 and additional shipping days in 2024.
As part of its 2028 Enterprise Goals, Altria targets generating mid-single-digit adjusted EPS growth through 2028 (on a compounded annual basis). It targets annual dividend growth in the mid-single digits through 2028. The company plans to maintain a debt-to-consolidated EBITDA ratio of roughly 2.
Further, Altria plans to maintain a total adjusted OCI margin of at least 60% in the next five years. Finally, it 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. Management targets nearly doubling its smoke-free net revenues to $5 billion from the 2022 level.
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