Altria Group, one of the biggest players in the tobacco industry, is preparing to release its fourth-quarter earnings this Thursday. As the company navigates through various challenges, such as high inflation and the emergence of illicit e-cigarettes, investors are paying close attention.
Stable Revenue Expected
Analysts surveyed by FactSet anticipate that Altria will report approximately $5.1 billion in net revenue for the quarter, which is on par with last year’s figures. Net income is projected to be $2.1 million, representing a 2% decrease compared to the same period in the previous year. This translates to earnings per share of $1.18.
A Brighter Outlook
Despite the difficulties faced in the third quarter, where sales volumes declined significantly, Altria has a more positive outlook for the fourth quarter. Although prices of their cigarette products increased by 8.7% compared to the previous year, sales volumes fell by 11.6%. As a result, net revenue for the smokable segment experienced a 5.3% decline YoY.
Evolving Consumer Preferences
The numbers highlight the ongoing challenges faced by cigarette companies as more consumers either quit smoking altogether or switch to alternative products such as heated tobacco, e-vapor, and oral nicotine pouches. In fact, British American Tobacco recently announced a substantial $32 billion write-down of its cigarette brands, causing its stock as well as Altria and Philip Morris stocks to plummet.
Steady Growth in Oral Tobacco
While Altria’s oral tobacco products saw a 3.3% decrease in volume compared to the previous year, higher prices mitigated the loss and contributed to a 2.3% growth in net revenue for this segment. However, the decline in volume can partly be attributed to inflation and consumers’ reduced disposable income. Furthermore, the illegal sale of disposable e-cigarettes has negatively impacted Altria’s customer base.
Legal Disputes and Challenges
In an effort to combat unfair competition caused by flavored e-cigarettes, Altria’s e-cigarette subsidiary, NJOY, filed an injunction against several e-vapor manufacturers in October. These manufacturers were accused of violating state and local bans on flavored e-cigarettes. Altria’s Chief Financial Officer, Sal Mancuso, acknowledged that these factors, along with inflation and tighter consumer budgets, contributed to the decline in volume.
Industry Transition and Altria’s Unique Journey
Tobacco companies have been adapting to shifting consumer preferences by focusing on smokeless product alternatives. However, Altria has faced a particularly arduous and protracted journey in this transition.
Altria’s fourth-quarter earnings report will shed light on how the company is faring in the midst of industry challenges and its efforts to navigate a changing landscape.
Altria’s Evolving Investment in the E-Vaping Industry
In 2018, Altria made a significant investment of $12.8 billion to acquire a 35% share in JUUL Labs, an e-vaping company. However, since then, JUUL has faced legal troubles regarding its alleged aggressive marketing towards young individuals, leading to concerns about youth vaping.
The value of Altria’s investment in JUUL has significantly decreased, reaching just $250 million by the end of 2022. As a result, Altria decided to exchange its stake in JUUL for a nonexclusive global license to some of the start-up’s heated-tobacco intellectual property in March of that year.
To further expand its presence in the e-cigarette market, Altria acquired NJOY, a company that had received clearance from federal regulators. This strategic move allowed Altria to develop its own e-cigarette products.
Despite experiencing subdued share prices, Altria has been committed to delivering value to its shareholders through share buybacks and dividend payments.
During the first nine months of 2023, Altria repurchased 16.3 million shares at an average price of $44.97, amounting to a total of $732 million returned to shareholders in cash. The company anticipates completing an additional $268 million worth of share repurchases by the end of 2023.
Altria has also maintained its reputation as a reliable dividend payer, increasing its dividend by 4.3% in August. This marked the 58th consecutive dividend increase over the past 54 years. Furthermore, Altria plans to sustain its dividend goal, aiming for mid-single digit growth each year.
Looking ahead to 2023, management projects adjusted earnings per share (EPS) to range between $4.91 and $4.98. This suggests a growth rate of 1.5% to 3% compared to the previous year.
Although Altria’s lack of growth has resulted in its shares remaining relatively stable over the past 18 months, analysts on Wall Street still foresee potential upside in the stock. The average target price stands at $47, which represents an approximate 18% increase from the current level of $40.
In a recent research note, analysts at Goldman Sachs expressed their belief that Altria will manage to counterbalance the volume decline by implementing substantial price increases in the fourth quarter. However, they also noted that the stock is likely to remain stable until the volume decline moderates.