Can Smokeless Unit Aid Altria (MO) This Earnings Season?

Altria Group, Inc. (NYSE:MO) is slated to release first-quarter 2018 results on Apr 26, before the opening bell. While Altria’s earnings surpassed the Zacks Consensus Estimate in the last quarter, it has a mixed record of earnings surprises over the trailing four quarters.

We expect the company to gain from sturdy advancements in the smokeless products category, which will be reflected in the upcoming quarterly results. However, softness in its smokable unit has long been a challenge to the company’s top line. That said, let’s see how things are shaping up for this tobacco giant, prior to the quarterly release.

Smokeless Segment

Smokeless products, also popularly known as reduced risk tobacco products (RRPs), are rapidly gaining traction, considering their less detrimental impacts on health. Altria has been promptly responding to this trend and offers several RRPs which helped it maintain market share. The company’s flagship MarkTen and Green Smoke e-vapor products are some of the products performing strongly in the smokeless category. In fact, MarkTen is now a leading e-vapor brand in the United States. Also, Altria’s marketing and technology agreement with Philip Morris (NYSE:PM) to market MarkTen e-cigarettes internationally and the distribution of heated tobacco products in the United States is expected to boost businesses of the companies.

Buoyed by efforts to strengthen RRPs, revenues (net of excise taxes) from the Smokeless product category advanced 11.1% to $542 million in the fourth quarter of 2017. Given Altria’s impressive strides in this regard, we expect such trends to continue. Moreover, analysts polled by Zacks expect net revenues (net of excise taxes) of approximately $471 million from this unit during the first quarter, indicating an improvement of 8% from the year-ago quarter’s figure.

Pricing Also a Growth Driver

Altria’s strong pricing has helped it stay afloat in the industry amid declining cigarette volumes. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. In fourth-quarter 2017, higher pricing led to a rise in adjusted operating company’s income (OCI) and margins in its segments. The company continues to expect pricing as a key growth driver in the near term.

Industry Headwinds Mar Cigarette Volumes

Although Altria has been strongly progressing with its smokeless products, things look gloomy when it comes to the company’s cigarettes category and smokeable products as a whole. Well, unfortunately, persistent decline in cigarette volumes has been a hindrance for Altria’s smokeable segment for a while. This in turn, can be attributed to regulatory hurdles in the form of limitations on marketing, anti-smoking campaigns and higher excise duties. Apart from this, rising health consciousness among consumers has lowered cigarette consumption globally. Together, these factors have been weighing on cigarette sales volumes. As a result, shipment volumes in the smokeable segment declined 2.6%, 2.7%, 6.1% and 8.7% respectively in the preceding four quarters. In fact, during fourth-quarter 2017, total cigarette retail share declined to 50.3%, representing a 0.8 percentage point slip. This was largely due to a 0.7 share point drop in Marlboro’s retail share, which stemmed from intense competition and increase in cigarette excise tax in California. On account of such headwinds, the consensus estimate for smokeable segment revenues is currently pegged at $5,349 million for the first quarter — reflecting a drop of nearly 2% from reported smokeable revenues in the year-ago period.

Apart from Altria, declining cigarette sales volumes have been hurting other tobacco players like Philip Morris, British American Tobacco (NYSE:BTI) and Vector Group (NYSE:VGR) . Nevertheless, we believe that favorable pricing and rising demand for smokeless products will help Altria overcome the aforementioned hurdles. Additionally, the company’s consistent focus on making investments in core growth areas, improving retail fixtures and making enhancements to brands like Marlboro will lift its market share and aid the firm to maintain its leading position in the tobacco space.

All, said lets now take a look at the picture unveiled by the consensus marks for earnings and sales as well as the Zacks Model for the upcoming quarterly announcement.

Altria Group, Inc. Price, Consensus and EPS Surprise

Estimates Bode well

The current Zacks Consensus Estimate for earnings for the first quarter of 2018 is pegged at 93 cents, which represents a 27.3% growth from the year-ago quarter. This estimate has declined by a cent over the last 30 days. Further, analysts polled by Zacks expect revenues of $4,619 million for the impeding quarter, reflecting a rise of almost 0.7% from the year-ago quarter.

Zacks Model

Our proven model does not conclusively show that Altria will beat earnings estimates this quarter. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can see the complete list of today’s Zacks #1 Rank stocks here.

Although Altria’s Zacks Rank #2 increases the predictive power of ESP, its Earnings ESP of -0.31% makes us less confident about an earnings surprise.You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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