2 reasons why Altria is headed to $31.50

Higher cigarette pricing and a dominant position in the smokeless tobacco industry are key growth drivers.

By Trefis Feb 28, 2012 11:10AM
Steve Mason/Photodisc Blue/Getty ImagesCigarette companies in the U.S. are often overlooked given the unpopularity of the tobacco business and the industry's falling cigarette volumes. Altria Group (MO), in particular, receives a fair share of this criticism since it operates only in the U.S., a country with one of the harshest regulatory environments.

But there are two compelling reasons for investors to take a second look at Altria -- key growth drivers to its business in the coming years.

Altria's main competitors are Reynolds American (RAI) and Lorillard (LO) in the U.S. We have a $31 price estimate for Altria, which is about 6% above the market price.

1. So what if cigarette volumes are declining

For 2011, cigarette revenue stood at $21.4 billion, down 1.1% from 2010. However, more importantly, revenue net of excise duties were up 0.4% at $14.6 billion. This was in spite of the fact that total cigarette shipment volumes declined 4% for the year. Clearly, the company is focused on generating higher profits rather than increasing its market share through price competition.

Altria Market Share in Number of Cigarettes Sold in US

The company increased prices for all of its cigarette brands twice last year, the second time was in December. Had Altria been worried about the falling cigarette volumes, the company certainly wouldn't have increased the prices. By increasing the cigarette prices, the company also shields itself from excise duties better, thereby increasing the profit margins. The company reported operating income for the segment rose 2.3% to $5.6 billion. Excluding special items, the operating income was even higher at $5.9 billion.

Altria Cigarettes EBITDA Margin

2. Altria dominates smokeless tobacco products

If anyone thinks that the escalating cigarette prices will force consumers to quit smoking, they are probably wrong because smokers will always find something to smoke or do. And smokeless tobacco products, currently spared from the wrath of the regulatory environment, are doing well. They are usually perceived to be less harmful and attract lower excise duty. Moreover, since they do not involve smoke, they can be consumed at places that otherwise prohibit smoking.

Altria Market Share in Smokeless Tobacco

As per our estimates, Altria commands a 43.7% market share (by volumes) in the U.S. smokeless tobacco market, and we expect this to increase to 45.2% by the end of our forecast period.

Total volume shipments for Copenhagen and Skoal combined witnessed a healthy growth of 6.5%. Both the brands benefited from new product introductions in the year 2011, which included Skoal Snus and the availability of Copenhagen Wintergreen and Skoal X-tra in pouches. The gains were partially offset by volume declines in its other portfolio brands, including Marlboro Snus. Since the smokeless tobacco segment is growing at 7% annually, this is a significant revenue addition for the company.

Altria Smokeless Products Market Size in US

Altria has delivered solid financials for other segments such as cigar and wine. It also has a 29% stake in SABmiller. There is a lot more to Altria than falling cigarette volumes.

Feb 28, 2012 12:36PM
I think MO is a excellent investment. It has consistently been trading close to it's 52 week high and pays a very nice dividend. Also the company seems to consistently raise their dividend on a annual and sometimes bi-annually so what's not to like.
Feb 28, 2012 1:33PM
Still no sign of Atria or others getting into electronic cigarettes, so see  E Cig Werks blog for more.
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