Tobacco companies maintain fat profits
Cigarette makers resort to raising prices periodically to make up for declining sales.
Boost to profitability
The excise taxes have been relatively stable of late so an increase in the retail prices will boost the profitability of tobacco companies. Price hikes are likely to continue in the future as well. Cigarette volumes have been declining as more consumers are aware of the repercussions of cigarette consumption. Hence, tobacco companies have resorted to raising their product prices periodically in order to maintain profitability. This is possible because cigarettes are known to exhibit low negative elasticity (for example, a large price hike causes cigarette consumption to fall only slightly).
Besides cigarettes, Altria has decided to raise the prices of its Marlboro Snus by five cents, while Reynolds American is increasing the prices of its Camel Snus by 10 cents. Altria's strong pricing in the recent past has led to some market share erosion but, overall, the picture looks good for the company as the volumes for smokeless tobacco products are growing at an annual rate of 4-5% and margins for this division have shown a constant improvement.
We have a $32.60 price estimate for Altria, which is slightly below the current market price.
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The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
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