Altria Loses 15% in a Year: Can Strategic Efforts Aid Growth?

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Cigarette consumption rates have been charring down, which in turn has been choking the performance of major tobacco players like Altria Group, Inc.MO . Evidently, these hurdles have caused shares of this Virginia-based company to plunge close to 15% in the past year, wider than the industry 's decline of 10.5%. Nevertheless, Altria is trying all means to find a breather in reduced risk tobacco products (RRPs) - which have been gaining traction.

Receding Cigarette Volumes Raise Concerns

Altria and other tobacco industry majors received quite a jolt last year when the FDA came up with the proposal to drastically lower nicotine content in cigarettes. This along with the FDA's norms to display self-critical advertisements on television and newspapers to dissuade customers from smoking and using precautionary labels on cigarette packets, have been weighing on the tobacco segment. Moreover, in the process of adhering to previous regulatory policies, tobacco manufacturers are required to seek marketing authorization for the introduction of any tobacco product. Additionally, the European Union and the FDA have proposed a ban on menthol in accordance with the Tobacco Control Act. Per the Act, menthol cigarettes have an adverse impact on public health. That said, Altria and other companies in the multi-billion tobacco industry such as British American Tobacco BTI and Vector Group VGR have quite a lot to worry about when it comes to cigarette products.

Thanks to the aforementioned challenges, Altria's top line lagged the Zacks Consensus Estimate in eight out of the last 10 quarters. In fact, Altria's domestic cigarette shipment volume fell 8.9% year over year during the fourth quarter of 2017, due to lower cigarette industry volumes, unfavorable trade inventory movements and decline in retail share. Total cigarette retail share declined to 50.3% during the period, representing a 0.8 percentage point slip. Moreover, declines of 6.2%, 2.7% and 2.6% in Altria's cigarette shipment volumes were incurred during the third, second and first quarters of 2017, respectively.

With little or no hopes of attaining growth in cigarettes, Altria is focusing on its smokeless or reduced risk products. Let's take a look at the efforts undertaken in this segment and other factors that have been aiding this Zacks Rank #3 (Hold) company. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Reduced Risk Products: The New Growth Mantra

The future for tobacco companies seems to be smoke-free, given the growing popularity of RRPs. Altria has been promptly responding to this changing market scenario. To this end, it has offered several reduced risk tobacco products which helped it maintain market share. In e-vapor, Altria's subsidiary Nu Mark LLC continues to boost MarkTen volume, which expanded 60% in 2017, courtesy of greater distribution and category growth. MarkTen's full-year 2017 national retail market share was approximately 12.5% in mainstream retail channels. Further, it forms nearly 70% of e-vapor volumes in those channels. Notably, Altria's flagship MarkTen and Green Smoke e-vapor products are performing strongly in the smokeless category. In fact, MarkTen is now a leading e-vapor brand in the United States.

Backed by efforts to strengthen RRP portfolio, revenues (net of excise taxes) from the Smokeless product category advanced 11.1% to $542 million in the fourth quarter. This was mainly buoyed by better pricing and improved Copenhagen volumes. We expect such trends to continue fueling Altria in the forthcoming periods. Also, Altria's marketing and technology agreement with Philip Morris PM to market MarkTen e-cigarettes internationally and the distribution of heated tobacco products in the United States is expected to boost the businesses of the companies.

Positive on the Journey Ahead

Despite the headwinds plaguing the cigarette category, Altria has managed to stay afloat in this segment on the back of strong pricing. It has been witnessed that smokers tend to absorb price increases owing to the addictive quality of cigarettes. We expect the company to continue reaping benefits from such effective pricing strategies in the forthcoming periods. Additionally, the recent tax reforms favorably impacted Altria's 2017 earnings, and are expected to benefit the company going ahead. Evidently, management expects lower corporate tax rate and lower taxes on AB InBev dividends to augment the company's bottom line in 2018.

Apart from this, management is focused on making investments in core growth areas like undertaking innovations, coming up with launches like iQOS, improving retail fixtures and enhancing brands like Marlboro to boost market share. Moreover, on the back of these efforts and expected gains from tax reforms, management provided a positive earnings outlook for 2018. That said, we hope such well-chalked endeavors to aid the company to offset the hurdles and continue as one of the prominent names in the tobacco industry.

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Altria Group (MO): Free Stock Analysis Report

Philip Morris International Inc (PM): Free Stock Analysis Report

British American Tobacco p.l.c. (BTI): Free Stock Analysis Report

Vector Group Ltd. (VGR): Free Stock Analysis Report

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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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