We recently reiterated our Neutral recommendation on Altria Group Inc. ( MO ), the manufacturer and seller of cigarettes, smokeless products, wine and provider of financial services in the US. The company reported earnings of 49 cents per share in first quarter of fiscal 2012, which were in line with the Zacks Consensus Estimate, but surpassed prior-year results by 11.4%.
The upswing in earnings came as a result of long-term premium brand-building initiatives by Philip Morris USA as well as strong performance and increased market share of the company's iconic Marlboro brand. New products launched in the smokeless product segment also boosted the company's top-line performance.
Altria has a strong brand portfolio of tobacco and wine. Its portfolio is enriched with popular names like Marlboro, Virginia Slims, Copenhagen, Skoal, Chateau Ste. Michelle and Columbia Crest. Marlboro continues to provide the company a favorable edge over its competitors.
Marlboro commanded a dominating market share for several years on the back of newer innovations to suit consumer taste and preference. Marlboro Black and Mild and the newly launched Marlboro Black in non-menthol and menthol varieties occupy a major portion in the market. In addition, the Copenhagen and Skoal brands rule the smokeless category. Copenhagen has ventured into newer segments by launching Wintergreen extra-long-cut, natural varieties.
Moreover, the company's new collaboration with Okono A/S, a pharma research company engaged in development and manufacture of nicotine gum with additional capabilities in other products and technologies, to develop innovative, non-combustible nicotine-containing products for adult tobacco consumers marks the company's ability to correctly gauge consumers' choice.
There has been a general shift of consumers to low risk and smokeless tobacco products. The new venture will help the company gain market share in the industry.
However, governments around the world are imposing restrictions on tobacco companies to discourage smokers. This, in turn, is further dragging cigarette consumption across the world.
The US Food and Drug Administration (FDA) has passed a ruling that will compel tobacco companies to use strict warning labels on their cigarette packets to turn customers away from smoking. Governmental actions that outlaw the use of tobacco products, along with the diminishing social acceptance of smoking, will adversely impact the company's volume in many markets going ahead
Moreover, the FDA has also proposed a ban on menthol in tune with the Tobacco Control Act, which essentially stated that menthol cigarettes have an adverse impact on public health and the removal of menthol would be a benefit.
The FDA is currently reviewing the recommendation, among many other factors, including the unintended consequences of a menthol ban. As a result of this regulation, costs for the company increased in an effort to comply with the FDA's requirements. Moreover, this type of a ban will lead to black marketing of the products, which would be incredibly detrimental to all parties.
Currently, Altria carries a Zacks #3 Rank (short-term Hold rating).
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