Altria offsets lower demand by hiking prices

Cigarette sales by subsidiary Philip Morris underpin profitability, stock price.

By Trefis Dec 22, 2011 2:51PM
Image: Man smoking (© Steve Mason/Photodisc Blue/Getty Images)Philip Morris USA, Altria Group's (MO) subsidiary, has hiked its cigarette prices for the second time this year. The price increase of 5 cents per pack will affect all of its 14 brands.

Cigarette manufacturers across the country have continued to raise prices as they adjust to shrinking demand. Reynolds American (RAI) is also raising prices by 5 cents per pack, while Lorillard (LO) will increase prices by 6 cents per pack.

Even though the state excise taxes have risen only 3% this quarter compared to 8% last year, this hasn't stopped the big three tobacco companies -- Altria, Reynolds American and Lorillard -- from raising prices. The big three continue to command strong pricing power, and we expect the profit margins to increase even though cigarettes sales are expected to decline. This is Altria's second price increase for the year, and it raised prices twice in the previous year as well.


Altria's stock price has increased by about 20% this year as investors continue to be optimistic about the company and the overall tobacco industry. We expect Altria's profit margins on cigarettes to increase from 39% currently to 43% by 2014.


Altria Cigarettes EBITDA Margin

The move will see improved margins for retailers, especially to those that are part of Marlboro Leadership Price (MLP) program. The MLP program was first started in April and offers $2 per Marlboro carton in exchange for maintaining a price no higher than the designated MLP.


By our estimates, cigarettes constitute 73% of Altria's stock price, so any change in the cigarette profitability will also have a significant impact on the overall stock price. We have a $31 price estimate for Altria, which is about 10% above the market price.


See our complete analysis of Altria stock here.



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35Comments
Dec 22, 2011 7:49PM
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Being a combat vereran of more than 30 years of which I smoked for almost 60 years I am in good health at almost 70. If I had not smoked during my combat I would have gone nuts and would most likely would not be here now. Let the indivdual make the choice not the friggen government. Let me live my life as I please. This second hand smoke is a bunch of B.S. i LIVE the way I WANT to.Smoke,drink,look at porn, take care of my family, pay my bills and taxes,and don't bother other people.Get off my back and leave me the hell alone. I am sick and tired of other people telling ME how to live my life.
Dec 22, 2011 7:44PM
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Two and a half years ago I quit smoking. Before I quit I hated the anti-smoking Nazis.  I even intentionally smoked more on the great American smoke out day.  Today I still hate the anti smoking Nazis. Smoking prople do not bother me one bit.  The sanctimonius jerks who attack smokers are the real problem.
Dec 22, 2011 5:17PM
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Fewer Cig sell, less tax money....less tax money the gov just tax something else.....GREAT NOW everyone will get to pay more taxes......Smokers are the true Americans...We pay and pay..you non-smokers dont want us to quit...then it your turn to pay taxes on something.
Dec 22, 2011 5:17PM
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WARNING:

This is going to be a Major problem in the future.

When everyone either quits smoking or dies then how is the government going to replace the revenue?

What are they going to start taxing higher next?

Milk, bread, water, gas housing or any of the other items that we depend on. That's where.

I'll never defend smoking, it's a horrible habit, but one day the American public will be sorry for taxing it out of existence.

Being forewarned is being prepared and sooner or later we will all realize that the only thing we mean to big business is profit. But by then it will be too late!!!!

Dec 22, 2011 4:21PM
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Electronic cigs are great! I still smoke a couple of the real ones everyday, but I'm down from smoking 30-40 per day. Also, e smoking is costing me only a few bucks per month, even though I use it several times daily.  I wish I would've tried one sooner.
Dec 22, 2011 7:08PM
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Even though I have quit smoking using a electronic cigarette, I still respect the personal rights of people who choose to smoke.  Believe me, I understand the frustration of being lectured by self-righteous non-smokers.  Quitting or not quitting is a personal decision that one must reach on their own.  No amount of chiding by others ever got anyone to quit, and neither will the increasing price of cigarettes.

 

There are just three groups of people that it still seems to be OK to beat up on in this country:  People of faith, fat people, and smokers.  Cigarettes are not illegal, yet.

Dec 22, 2011 6:41PM
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MARCO MARCO: What in hell do you care what the **** I spend my money for,  if I want to smoke I'm going to regardless, and I'll still pay my house payments, car payments, and insurance your defense is weak. so get the hell off of it .if everyone quit where will the price on other stuff go up to  like milk, food, gas, and whatever else.
Dec 22, 2011 4:30PM
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The tobacco companies have to pay the states every year as part of the settlement to the lawsuits the states filed.  The problem for the states is that the amount they get is determined by the number of cigarettes that are sold in that state.  If fewer cigarettes are being sold that means the states get less money. 

 

This will be a problem because some states already spent the money and planned on repaying it with the money they get from the tobacco companies, this means that states, which are already having budget shortfalls, will face a new problem that they’ll have to deal with.

 

The tobacco companies will collect higher profits while the states struggle.

Dec 22, 2011 4:14PM
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technology has made the traditional cigarette as obsolete as the typewriter ..electronic cigarettes...no fire, no smoke, no tar
Dec 22, 2011 5:42PM
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so lets say we wipe out smoking, now everyone lives until 100....but they quit working at 67, any healthcare cost saved has been wiped away 10000X...puff, puff

 

All us smoker ask is let us have our places, bars, casinos........you can have the rest 

Dec 22, 2011 4:53PM
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Time to start bootlegging through the Cartel
Dec 22, 2011 7:20PM
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I have a solution to all the worries on loss of revenue! Legalize The Ganja! Get America right out of debt! America took back her booze from the mob in the twenties or thirties and now it's time America takes back her herbals! I am a pack a day smoker and it effing sucks! I'm on the cusp of tossing cigs for good and everyone should do it too! It is really hard to do so, most won't! oh well, thank God it's our choice!


examples of revenue from green tobacco - taxes paid by legal farmers, sales taxes would be huge,  etc.

Take the money made from cigs and quadruple it!
I can see it now, Uncle Sam saying, "I'M RICH BIAATCH!!...again!"


Dec 22, 2011 6:45PM
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I have to agree with the first two posters.  The best thing to ever come along to help quit smoking are electronic cigarettes.  Now if we can just keep the FDA out of it....

 

After smoking for 37 years, I purchased and electronic cigarette a year and a half ago, and have not smoked a regular cigarette since.  I'm sure most people know that it's not the nicotine that kills you, it's the burning tobacco.  Electronic cigarettes create no heat or smoke, but mimic the behavior of smoking, which was the hardest thing for me to give up as an ex-smoker.

 

Electronic cigarettes are not promoted as quit-smoking devices or regulated by the FDA.  The FDA has a vested interest in keeping people smoking.  They benefit from both the sale of cigarettes, and the sale of stop-smoking drugs, some of which make people suicidal.

Dec 22, 2011 6:22PM
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I probably did smell bad, but that's certainly not a reason for me to quit. To be honest, if someone said that to me, I'd probably make it a point to smell extra smokey around them. Everyone has some sort of vice whether it be their giant televisions and iPhones or their cigarettes. Some reek of smoke and others of smugness. Just remember that one person's fragrance is another person's odor.
Dec 22, 2011 6:55PM
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Tobacco was a cash cow for this country before it even WAS a country.  As a profitable and productive business, the Liberals (who do nothing and produce nothing) have to see it destroyed.  As for the Postal Service not shipping cigarettes anymore, this lie is exposed by way of the fact I still get my prescription narcotics delivered by US Mail.  So much for the argument that minors can get their grubby hands on contraband.

Obama and his commie-symp ilk need to be removed from office and placed in nice, safe jail cells for their treasonous antics.

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First, nonsmoking do-gooders can pick up the tax hike because tobacco taxes arent being paid.  Yes, thats right. All of those people that want to complain about smoking can literally pay the price for their nagging through a tax hike. Tax revenue has to come from some where.  Or, if they feel that they shouldnt have to pay a tax increase, then I say shut up.

Secondly, why should you do-gooders point fingers at smokers? Should we not be focusing on larger environmental issues?  How about car pollution or dependencing on oil? All of which contributes to more pollution then smokers holding a cigarette.  Why do you feel the need to make nasty comments about others when your driving around in your SUV, or other gas guzzling car?  Perhaps smokers will quit smoking when you buy a Schwinn.   You see, smokers arent hypocrites. They know what they do isnt healthy, they acknowledge it, they often remove themselves from groups to go do their nasty habit - but not do-gooder hypocrites.  Remember, when you hold out your pointed finger, you have 4 pointing right back at you.

Dec 22, 2011 10:46PM
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I don't understand why this country continues to shoot itself in the foot. Sure, even as a smoker I'll admit it's a nasty habit, but as pointed out previously, the taxes generated by smokers pay for a heck of a lot on the state level. So let's pick the worst recession in recent history to try to get people to quit! Not only does that lower the taxes coming in, but it also puts people out of work. If the tobacco companies aren't selling as much, they don't need as many employees to produce less, etc. In the middle of a recession. Freaking brilliant. As for the price increase, let them. We realized we couldn't afford $7 a pack a couple of years ago and invested $65 in a machine to make our own. Between that, the $2 for a carton of filters and the local smoke shop down the street we're paying about 80 cents per pack. It costs more to fill the tank on the car than it costs to cover smokes for 2 people in a given month. The bonus? A heck of a lot less added chemicals. I can't do much about the smell, but I'll work on that if the complaining non-smokers can tell me how to minimize the overpowering cologne a coworker wears!  
Dec 22, 2011 5:44PM
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Marco Marco.. have you ever smelled anything you liked?
Dec 22, 2011 9:41PM
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If you want to smoke...its YOUR choice....I have smoked, quit (3 yrs. 1 time, 1yr another time) and currently smoke....

Its B.S. how "some" non-smokers get SO high n mighty, wanting to dictate to others about smoking;....my fav, was few yrs ago...

I was on a "smoke break" at work....and these 2 woman walked by (this was at an outdoor mall in the south) and one turned to the other and said "This place is communist....look how everybody smokes, it should be banned!"....and I replied "Honey,....you have the choice to smoke, if it was banned OR mandatory...that would be like communism!....then blew a nice smoke right her way...LOL!"

Dec 23, 2011 11:13AM
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Do you people honestly believe that all the taxes received on cigarettes sales goes to health care costs? Get real. What about the taxes that the cigarette companies pay to be in business? What about the taxes their employees pay not only in payroll taxes, but on the things they purchase? How many of them will still have jobs if everyone quits smoking?

I quit because I wanted to, but I've made it a point to NOT become one of those "reformed smokers" that everyone hates.  Smoking is a choice.

It amazes me to hear how sanctimonious some people are.

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