Altria (MO) Q2 Earnings: Can Smokeless Products Offset Woes?

Altria Group, Inc. MO is slated to release second-quarter 2018 results on Jul 26, before the opening bell. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 4.6%.

We expect the company to gain from sturdy advancements in the smokeless products category in the upcoming quarterly release. However, softness in smokable unit has been marring performance for long. That said, let’s see how things are shaping up for this tobacco giant, prior to the announcement.

Low Risk Products & Pricing Bode Well

The reduced-risk tobacco products market is being bolstered by consumers’ growing awareness regarding the harmful impacts of cigarettes. Notably, Altria’s flagship MarkTen and Green Smoke e-vapor products are performing impressively in the smokeless category. In fact, MarkTen is now a leading e-vapor brand in the United States.

Altria Group, Inc. Price, Consensus and EPS Surprise

 

Altria Group, Inc. Price, Consensus and EPS Surprise | Altria Group, Inc. Quote

To exploit opportunities offered by the segment, Altria has been indulging in innovation and developing products with reduced risk claims. In this respect, the company recently submitted a modified risk tobacco product application to FDA for Copenhagen Snuff. Additionally, the marketing and technology sharing agreement between Philip Morris PM and Altria, which is currently under FDA review, is expected to boost the business of the parties.

Needless to say, such efforts are expected to help Altria in expanding presence in the smokeless category and continue to fuel performance. That said, we expect the upcoming quarterly release to reflect benefits from this segment. Moreover, the Zacks Consensus Estimate for net revenues is pegged at approximately $592 million from this unit, indicating an improvement of almost 5% year over year.

Declining Cigarette Sales Likely to Continue

When it comes to the smokeable category, the picture is quite gloomy. Unfortunately, persistent decline in cigarette volumes has been a hindrance for Altria’s smokeable segment for a while. Incidentally, shipment volumes in the smokeable segment declined 4.1%, 2.6%, 2.7% and 6.1% in the preceding four quarters, respectively. In fact, during the first quarter, total cigarette retail share declined to 50.3%, representing a 0.7 percentage point slip from the year-ago quarter’s figures. This was largely due to a 0.5 share point drop in Marlboro’s retail share.

Such downturns were caused by regulatory hurdles in the form of limitations on marketing, anti-smoking campaigns and higher excise duties. Apart from this, rising health consciousness among consumers lowered cigarette consumption globally. On account of such headwinds, the consensus estimate for second-quarter shipment volume growth for the smokeable segment is pegged at a decline of around 6.3%. Apart from Altria, declining cigarette sales volumes have been hurting other tobacco players like Philip Morris, British American Tobacco BTI and Vector Group.

Weaknesses stemming from the smokeable segment are likely to mar overall top-line performance. Well, analysts polled by Zacks expect net revenues of $5,043 million for the impending quarter, reflecting a decline of close to 1% from the year-ago quarter.

Nevertheless, strong pricing has been aiding Altria’s smokeable segment for a while, helping the company to stay afloat in the industry amid declining cigarette volumes. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price hikes owing to the addictive quality of cigarettes. In first-quarter 2018, higher pricing led to a rise in adjusted operating company’s income (OCI) and margins in the smokeable and smokeless segments. The company continues to expect pricing as a key growth driver in the near term.

Solid Earnings Trend Likely to Sustain

Altria has been delivering annual bottom-line growth for more than two years. Further, in the last reported quarter, earnings marked its third consecutive beat and rallied 30.1% year over year. Moreover, management expects lower corporate tax rate and lower taxes on AB InBev BUD dividends to augment the company’s bottom line in 2018. Such aspects boost our hopes regarding bottom-line performance for the impending quarter. To top it, the Zacks Consensus Estimate for the second quarter, which is currently pegged at $1.01, reflects a year-on-year improvement of almost 18.8%. Further, estimates have been stable over the past 30 days.

All, said lets now take a look at the picture unveiled by the Zacks Model for the upcoming quarterly announcement.

Zacks Model

Our proven model does not conclusively show that Altria will beat earnings estimates this quarter. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can see the complete list of today’s Zacks #1 Rank stocks here.

Although Altria’s Zacks Rank #3 increases the predictive power of ESP, its Earnings ESP of -0.23% makes us less confident about an earnings surprise. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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