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Altria's Valuation Depends on Charging More for Smokes

Altria Group ( MO ) is the parent company of Philip Morris which is the largest tobacco company in the U.S. with close to 50% of the retail market share in the U.S. cigarettes market, of which Marlboro commands a giant share of more than 42%. Thanks to strong pricing power and product mix, Altria Group's operating margin from its cigarettes business has risen steadily. The company recently announced its Q2 earnings in which it reported solid operating margins and retail share in premium tobacco brands, particularly Marlboro. (See Marlboro is Still the Man at Altria, Carries Results ) Altria competes with Reynolds American ( RAI ) and Lorillard ( LO ), two of its biggest competitors in the U.S.

While we estimate that Altria Group's operating margin from its cigarettes business will increase from 40% in 2011 to 45% by the end of our forecast period, Trefis members predict an increase to 47% during the same period. The member estimates imply an upside of 5% to the Trefis price estimate for Altria Group's stock.

We currently have a Trefis price estimate of near $27.25 for Altria Group, Inc.'s stock , which is slightly above the current market price.

Higher Pricing Drives Operating Margins

Philip Morris U.S.A. ( PM ), like most cigarette businesses in the developed world, depends on its pricing power for profitability with a modest focus on market share objectives. Since cigarette sales have been witnessing steady volume declines, profit margins are mainly maintained through price increases. For example, despite a 2% decline in the number of cigarettes sold, Philip Morris registered a 1.5% increase in operating margin from 2009 to 2010 because of a 6% increase in pricing.

Cost Savings through Manufacturing Optimization Program

To address the gradual cigarette volume declines and increase in federal excise taxes, Altria Group in 2007 started Manufacturing Optimization Program which is expected to deliver ongoing cost savings for the company. As part of this program, in 2009, Phillip Morris U.S.A. closed its production of cigarettes in the Cabarrus County, North Carolina and consolidated its manufacturing facility in Richmond, Virginia. We expect the operating margin will continue to improve due to lower asset impairment, exit, integration and implementation costs through initiatives like these.

Our complete analysis for Altria Group, Inc.'s stock is here .

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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