Amid receding cigarette and wine sales, Altria Group, Inc. MO is staying afloat on the back of pricing gains as well as growth in oral tobacco and other reduced risk products. In fact, it has been undertaking measures to boost presence in the oral tobacco space. Let’s introspect.
Pricing Acts as a Strong Support
Altria has long been benefiting from its strong pricing power, which has aided adjusted operating companies income (OCI) even amid declining cigarette volumes. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases due to the addictive quality of cigarettes. During second-quarter 2020, higher pricing boosted Altria’s adjusted OCI in both smokeable and oral tobacco product segments. This also supported the company’s bottom line, which inched up 0.9% in the said quarter.
Low Risk & Oral Tobacco Offer Some Respite
Consumer’s shift to low risk tobacco alternatives has been providing impetus to Altria’s oral tobacco category. During second-quarter 2020, revenues in the unit increased 9.6% from the year-ago quarter’s levels, driven by greater pricing and shipment volumes.
Markedly, Altria is undertaking dedicated endeavours to bolster presence in the low risk tobacco space. In this respect, the marketing and technology sharing agreement between Altria and Philip Morris PM, pertaining to the sale of IQOS in the United States, has been yielding. In fact, the FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020, which is likely to bolster the product’s sales.
Apart from this, 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 40,000 stores by the end of the second quarter of 2020, reflecting a 43% rise from the first quarter. Altria is also undertaking efforts to expand in the cannabis industry, evident from the acquisition of stakes of the Canada-based cannabis company, Cronos Group.
Low Cigarette & Wine Sales Hurts Revenues
Receding cigarette sales is putting pressure on the tobacco industry, thanks to consumers rising health consciousness, stringent regulations surrounding cigarette sales and anti-tobacco campaigns. Altria has been no exception to this downtrend and the struggle is well depicted on second-quarter 2020 top line.
Net revenues dropped 3.8% year over year, during the second quarter. The decline was mainly caused by softness in the smokeable products category, which fell 4.3% year over year due to reduced shipment volumes. The company’s cigarette unit is expected to stay gloomy in 2020. In fact, the company expects the domestic cigarette industry’s adjusted volumes to decline 2-2.5% for the year.
Additionally, we note that the pandemic has hurt the company’s wine business, which is likely to be under pressure due to restrictions on dining and gatherings. In second-quarter 2020, net revenues in the wine segment fell 20.6% year on year, while wine shipment volumes dropped 20.2%.
Despite headwinds in the smokeable products portfolio, continued gains from pricing and growth in oral tobacco are encouraging. Well, these aspects are likely to keep favoring the Zacks Rank #3 (Hold) company. The stock has gained 15.2% in the past three months compared with the industry’s rise of 4.1%.
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