Will Altria's (MO) E-Vapor Products Help Lift The Stock? (Revised)

Altria Group Inc. (NYSE:MO) has been grappling with declining volumes of cigarettes and strict anti-smoking regulations. While estimates have been stable ahead of the first quarter 2017 results, shares of Altria underperformed both the Zacks categorized Tobacco industry and the broader sector on a year-to-date basis. The stock rallied 6.9% compared to the industry’s gain of 15.8%. Further, the Zacks categorized Consumer Staples sector rose 7.6% over the said time frame.

We note that the company has been witnessing lower-than-expected sales in the past five out of six quarters, due to sluggish performance in the Smokeable Products segment as consumers are shifting from traditional tobacco products. Declining demand for cigarettes due to the ongoing anti-tobacco campaigns and price rise to offset the effect of rising taxes is also hurting cigarette consumption. Moreover, consumers are opting for e-cigarettes or substitutes for cigarettes, in turn affecting cigarette volume.

Despite these headwinds, the company’s focus on unconventional tobacco products is likely to cushion the stock. Altria is offering several low-risk tobacco products which is helping it to maintain share. Its flagship MarkTen e-cigarette brand (launched in 2014) and Green Smoke e-vapor products are some of the examples. MarkTen XL – a variant on MarkTen launched by the company in 2016 has been encouraging in lead markets.

Altria also signed an agreement with another tobacco maker Philip Morris International, Inc. (NYSE:PM) under which the latter markets Altria’s MarkTen e-cigarettes internationally and distributes two of Philip Morris’ heated tobacco products in the U.S. Additionally, the companies extended their technology sharing agreement in Jul 2015 to work on a joint research, development and technology-sharing framework for developing unconventional cigarettes. The joint venture has made excellent progress on branding and go-to-market strategies for non-conventional cigarettes in the U.S. market.

On Mar 31, Philip Morris has applied for pre-market approval of its iQOS heated tobacco product with the U.S. Food and Drug Administration, which will be sold by Altria in U.S., if the FDA grants Philip Morris’ request. Such collaboration is encouraging as it will help the participating companies maintain market share amid declining volume and growing awareness against tobacco products.

Altria has also managed to remain afloat and generate revenues with higher cigarette pricing in the face of unfavorable tax environment and 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.

For 2017, Altria remains optimistic and expects to maintain profit on the back of strong pricing power and brand building initiatives. Further, in order to augment its smokeable segment, Altria has taken over privately-held Sherman Group Holdings, LLC and its subsidiaries (Nat Sherman) in Jan 2017. Nat Sherman specializes in super-premium cigarettes and premium cigars. The takeover is in sync with Altria’s growth strategy of expanding portfolio.

The recent takeover of SABMiller (LON:SAB) by beer giant Anheuser-Busch InBev (NYSE:BUD) in Oct 2016, helped SABMiller’s biggest investor Altria in maximizing the value of its shareholders. Altria received a 9.6% ownership of AB InBev, and approximately $5.3 billion in pre-tax cash as per the terms of the acquisition which the company used to reinvest in its core businesses or/and return value to shareholders.

The sinful nature of its products is also an advantage for the stock. Tobacco sector in particular has always been interesting for investors, as these sinful stocks always yield handsome returns for the portfolio. Since people smoke both during times of recession as well as economic growth, such stocks are sometimes valued at a higher premium than companies that are more sensitive to economic trends. As a result, these stocks always benefit from the addictive nature of their products.

Zacks Rank and Key Pick

Altria currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the consumer staple sector is Lamb Weston Holdings Inc. (NYSE:LW) . Lamb Weston has long-term earnings growth rate of 4.19% and carries a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

(We are reissuing this article to correct a mistake. The original article, issued on April 12, 2017, should no longer be relied upon.)