Altria Group (MO) Q1 Earnings Miss Estimates on Weak Volumes

Altria Group Inc.MO reported weaker-than-expected results in the first quarter of 2017. Shares declined 1.2% in pre-market trading as both earnings and revenues lagged the Zacks Consensus Estimate. The company maintained earnings guidance intact for 2017.

Adjusted earnings of 73 cents per share lagged the Zacks Consensus Estimate by a penny. However, earnings increased 1.4% year over year driven by higher operating income in the smokeable segment and lower outstanding shares. This was offset by lower equity earnings from Altria's beer investment and lower income in the smokeless products segment, which was negatively impacted from the recall of some of its smokeless tobacco products.

In January, U.S. Smokeless Tobacco Co, a unit of Altria Group, had recalled some of its smokeless tobacco products after getting complaints from eight consumers in Indiana, Texas, North Carolina, Tennessee, Wisconsin and Ohio, who allegedly found some sharp metal objects in certain cans.

Revenues and Margins

Net revenue remained flat at $6.1 billion during the quarteras higher net revenue in the smokeable products segment were offset by lower net revenue in the smokeless products and wine segments. Revenues net of excise taxes increased 1.3% year over year to $4.59 billion, but missed the Zacks Consensus Estimate of $4.69 billion by 2.1%.

Supported by lower excise tax levied on products, gross profit increased 4.6% year over year to $2.78 billion.

A glimpse of Altria's stock performance reveals that its shares have been outperforming the broader Zacks categorized Consumer Staples sector since the past six months. The stock rallied 8.8% in comparison with the above mentioned sector's growth of 4.4%. Per the Zacks Earnings Preview , the earnings growth for the sector looks decent. While total earnings for the Consumer Staples sector are estimated to rise 4.3%, revenues are projected to improve 4.0%.

Segment Details

Smokeable Products Segment: Revenues net of excise taxes inched up 1.9% year over year to $4.0 billion despite a difficult year-over-year comparison. The increase was primarily driven by strong pricing, partially offset by lower volume and higher promotional investments. Total shipment volume decreased 2.6% year over year to 29.1 billion units. Cigarettes retail market share declined 0.1 share point to 51% in the quarter.

Adjusted operating companies income ("OCI") increased 8.1%, while adjusted OCI margins expanded 2.9 percentage points to 51.0%.

Smokeless Products: Despite higher pricing, revenues net of excise taxes declined 2.5% to $436 million in the first quarter, due to recall of some of its smokeless tobacco products. The recall also hurt Smokeless Products' shipment volume and market share. Volumes declined 5% to 195.8 million units, where Copenhagen and Skoal shipment volumes declined 4.9% and others declined 6.5% in the quarter. Total smokeless products retail share decreased 0.7 share points to 53.5% in the first quarter.

Adjusted OCI declined 7.8% and margins decreased 3.6 percentage points to 61.9%.

Wine: The segment's revenues net of excise taxes went down 2.9% year over year to $136 million owing to lower volumes. Wine shipment volume declined 10% to 1.7 million units due to delay in Easter holiday, which occurred in the first quarter of last year. Wholesalers also reduced year-end inventory which led to the decline in volumes.

Ste. Michelle's OCI declined 25.0%, primarily due to lower volume and higher costs. OCI margins decreased 4.6 percentage points to 15.4%.

Altria Group Price, Consensus and EPS Surprise

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


Altria reaffirmed earnings guidance for full-year 2017 and expects adjusted earnings in a range of $3.26-$3.32, up 7.5% to 9.5% compared with adjusted earnings of $3.03 in 2016. Further, it anticipates higher adjusted diluted EPS growth in the second half of the year compared with the first half, driven by the benefit of reporting four full quarters of equity income from Altria's beer investment in 2017 versus three quarters in 2016. Also, the second half will not have the impact of recall.Altria continues to expect 2017 full year effective tax rate on operations to be approximately 36%.

Financial Updates

Altria ended the quarter with cash and cash equivalents of $5.23 billion, long-term debt of $13.89 billion, and total shareholders' equity of $12.26 billion.

In Mar 2017, Altria's board declared a regular quarterly dividend of 61 cents per share. During the first quarter, Altria repurchased 7.7 million shares for approximately $551 million. As of Mar 31, 2017, Altria had approximately $1.4 billion remaining in the share repurchase program, which it expects to complete by the end of the second quarter of 2018.

Consolidation of Manufacturing Facilities

In Oct 2016, Altria announced the consolidation of several of its manufacturing facilities to streamline operations and achieve greater efficiencies. The consolidation, scheduled to be completed by the first quarter of 2018 is expected to deliver approximately $50 million in cost savings by the end of 2018.

E-Vapor Category in Focus

Altria's subsidiary Nu Mark LLC (Nu Mark) stepped up the distribution of MarkTen to approximately 10,000 additional stores. MarkTen also now is available in three additional flavors.

Productivity Initiative

In Jan 2016, Altria announced the implementation of an initiative for approximately $300 million in annual productivity savings by the end of 2017. Part of the savings is to be realized through reduced spending on certain infrastructure, and will be invested in brand building and regulatory capabilities. Such initiatives are anticipated to help the company reap higher profits over the long term.

Zacks Rank and Stocks to Consider

Altria carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the consumer staple sector include ConAgra Foods Inc. CAG , Lamb Weston Holdings Inc. LW and Medifast Inc. MED . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .

While ConAgra Foods has a long-term earnings growth rate of 8%, Lamb Weston has a long-term earnings growth rate of 4.2%. Medifast has posted positive earnings surprises in the trailing four quarters, making for an average positive surprise of 18.21%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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