Can Altria's (MO) Focus On Smokeless Products Fuel Growth?

Altria Group, Inc. (NYSE:MO) appears well-placed on the back of its impressive brand portfolio and strong pricing power. Though the company has been experiencing the jolts of declining demand for tobacco products and stringent government regulations to curb the consumption, management has been aggressively working toward producing smokeless products.

Impressively, the company’s shares have rallied 9.9% in the past three months, ahead of the industry’s gain of 6% and the broader Consumer Staples sector’s growth of 2%. Also, a Momentum Score of B and a long-term earnings growth rate of 7.4% highlight the stock’s inherent potential.

What’s Working Well for the Stock?

Altria has been gaining from its progress in the smokeless products category, which is also contributing significantly to the company’s performance. Its flagship MarkTen and Green Smoke e-vapor products are performing well in this category. In third-quarter 2017, MarkTen became a leading e-vapor brand in the United States with a retail market share of approximately 13.5% in mainstream retail channels. Management expects the smokeless product category, including e-vapor products, to continue performing well going forward.

Incidentally, Altria’s marketing and technology sharing agreement with Philip Morris International Inc. (NYSE:PM) , which is currently under the FDA’s review, can also prove to be beneficial for both companies for tapping greater opportunities in the e-cigarette realm.

Meanwhile, this leading tobacco company remains on track with its cost-reduction initiatives and consolidation of its manufacturing facilities to streamline operations. Also, the company has been riding on its robust brand strength and higher cigarette pricing in the face of unfavorable tax environment and declining cigarette volumes. Apart from cigarettes, better pricing trend favored the smokeless products category too, as evident from the company’s third-quarter 2017 results.

What’s Troubling the Stock?

Regulatory bodies are imposing restrictions on tobacco companies, which in turn, are lowering cigarette consumption. Moreover, the FDA directed companies to lower nicotine in cigarettes to non-addictive or minimally-addictive levels. Per the November 2017 court order, companies manufacturing cigarettes must make consumers aware of the health implications of smoking through advertisements via television channels, newspapers, websites, store displays and cigarette packs.

These industry concerns have been largely weighing upon the company’s top line, which lagged the Zacks Consensus Estimate in seven out of the trailing nine quarters. Also, the company’s net revenues fell 2.5% in the last reported quarter due to soft net revenues in the smokeable products segments. Further, revenues net of excise taxes slipped 1.3% year over year.

The afore-mentioned industry headwinds have not only marred Altria’s performance, but have also affected some other leading players in the industry like Philip Morris, Vector Group Ltd. (NYSE:VGR) and British American Tobacco (LON:BATS) p.l.c. (NYSE:BTI) .

Nevertheless, Altria’s focus on expanding in the smokeless products space may provide cushion and help fuel growth. The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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