The tobacco industry has long been bearing the brunt of lower cigarette sales volumes thanks to consumers’ rising health consciousness as well as strict sales regulations. Amid such a scenario, companies like Altria Group, Inc. MO have been expanding low-risk tobacco alternatives in order to stay afloat in the industry. These products are being widely accepted owing to their less detrimental impacts on health.
Markedly, Altria is gaining from growth in oral tobacco and other reduced risk products (RRPs). Moreover, prudent pricing strategies are supporting this Zacks Rank #2 (Buy) company’s performance. Shares of the company have gained 7.3% in the past three months compared with the industry’s rise of 10.3%. That said, let’s get a closer look at the factors supporting growth of this well-known tobacco player.
Efforts to Boost RRPs and Oral Tobacco
Altria is actively striving to boost presence in the RRPs arena. In this context, the marketing and technology sharing agreement between Altria and Philip Morris International Inc. PM, pertaining to the sale of IQOS in the United States, is worth mentioning. We note that the U.S. Food and Drug Administration (FDA) approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020. Also, the authorization from the FDA on sales of IQOS 3 is encouraging. Altria, through its subsidiary — Philip Morris USA, Inc. — is striving to make IQOS available across more stores in the United States. We note that other tobacco companies such as Turning Point Brands, Inc. TPB and British American Tobacco p.l.c. BTI have been expanding their offerings in the low-risk tobacco space.
Apart from this, the company is undertaking efforts to expand oral tobacco offerings. Altria, through its subsidiary Helix Innovations, holds 80% stake in certain companies of Burger Group that is engaged in the commercialization of the oral tobacco-derived nicotine (TDN) pouch product — on! Notably, on! was sold in more than 56,000 stores by the end of the third quarter of 2020, up 40% from second-quarter levels. Management believes that on! is a worthwhile addition to Altria’s smokeless portfolio, as oral TDN products are gaining popularity in the United States owing to their low-risk claims. The company is also undertaking efforts to expand in the cannabis industry. Markedly, the company acquired stakes of the Canada-based cannabis company, Cronos Group.
Pricing Helps Boost Revenues
Strong pricing for tobacco products has been a significant upside for Altria. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. During third-quarter 2020, higher pricing boosted Altria’s revenues and adjusted operating companies’ income in the smokeable as well as oral tobacco product segments. Markedly, pricing power is supporting Altria’s adjusted operating income despite the unfavorable tax environment and declining cigarette volumes.
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