Will Declining Volumes Hurt Altria's (MO) Earnings In Q2?

Altria Group, Inc. (NYSE:MO) is scheduled to report second-quarter 2017 results on Jul 27, before the market opens.

The question lingering in investors’ minds is, whether this tobacco maker will be able to deliver a positive earnings surprise in the to-be-reported quarter. The company’s earnings have lagged the Zacks Consensus Estimate by 1.4% in the first quarter. However, it has pulled off average positive earnings surprise of 0.7% in the trailing four quarters.

Let us see how things are shaping up for this announcement.

What Does the Zacks Model Unveil?

Our proven model does not conclusively show earnings beat for Altria this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Altria has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 86 cents. Moreover, the company carries a Zacks Rank #4 (Sell), which further makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Which Way Are Estimates Treading?

Let’s look at the estimate revisions in order to get a clear picture of what analysts are thinking about the company right before earnings release. The Zacks Consensus Estimate for the second quarter has declined by a penny in the last 30 days, while the same has remained stable at $3.28 for 2017.

Further, analysts polled by Zacks expect revenues of $4.97 billion and $19.70 billion for the second quarter and 2017, respectively.

Factors Influencing the Quarter

We note that Altria has been witnessing declining demand for cigarettes due to the ongoing anti-tobacco campaigns, government restrictions and higher cigarette prices in response to rising taxes on it. In fact, the U.S. Food and Drug Administration (FDA) has also made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. These regulations adversely impact the company’s performance and, in turn, its overall profitability. Additionally, consumers’ preference for e-cigarettes or substitutes for cigarettes are largely affecting the cigarette volume.

Evidently, Altria’s top line lagged the Zacks Consensus Estimate in six of the last seven quarters, including the last reported quarter. We expect the company to continue to feel the pinch of declining cigarette volumes in the upcoming quarter.

As smoking rates are declining in developed countries, the race to replace traditional cigarettes is putting pressure on the tobacco industry. Particularly, serious health hazards due to cigarette smoking have pushed consumers toward low-risk or reduced-risk products.

To match up this trend, the company is also shifting toward low-risk, smokeless tobacco products. Its flagship MarkTen e-cigarette brand (launched in 2014) and Green Smoke e-vapor products are expected to boost Altria’s results in the near term.

A glimpse of Altria’s stock performance shows that its shares have gained 3.5% in the last six months, underperforming the industry’s rally of 13.2%. In fact, the industry is currently placed at the bottom 25% (191 out of 256). Meanwhile, the broader Consumer Staples sector, of which they are part of, advanced 7.7%. Per the latest Earnings Preview, the earnings growth for the sector looks decent. While total earnings for the Consumer Staples sector are estimated to rise 3.1%, revenues are projected to improve 1.2%.

Stocks with Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

The Clorox Company (NYSE:CLX) has an Earnings ESP of +0.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tyson Foods, Inc. (NYSE:TSN) has an Earnings ESP of +1.64% and a Zacks Rank #2.

Energizer Holdings, Inc. (NYSE:ENR) has an Earnings ESP of +2.78% and a Zacks Rank #2.

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