Altria (MO) Third Quarter Profits Surpass Estimates Thanks to Strong Pricing

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Altria Group Inc. MO released third quarter 2020 results, in which both earnings and revenue exceeded Zacks’ consensus estimate and the latter rose year over year. Higher prices in the smoking and oral tobacco segments boosted results. Additionally, based on its year-to-date performance, among other factors, Altria has lowered its 2020 adjusted earnings per share guidance by raising the lower end of its previously guided range. In addition, the company raised its volume growth forecast for the domestic cigarette industry.

Quarter in detail

Adjusted earnings stood at $ 1.19 per share, which was flat year over year, but topped Zacks’ consensus estimate of $ 1.15. The increase in adjusted operating company profit (OCI) in the smoking products segment was offset by high income taxes and lower adjusted profit from the company’s investment in AB InBev BUD and Cronos.

Altria Group, Inc. Price, Consensus, and Surprise EPS

Altria Group, Inc. Price, Consensus, and Surprise EPS

Altria Group, Inc. price-consensus-eps-surprise-chart | Quote Altria Group, Inc.

Net income increased 3.9% year-over-year to $ 7,123 million. Revenue after deducting excise taxes increased 4.9% to $ 5,678 million. The consensus mark was $ 5,521 million. Revenue was supported by increased revenue in the smoking products segment.

Segment details

Smokable products: Net income for the category increased 4.4% year-over-year to $ 6,313 million, driven by higher prices, partially offset by increased promotional investments. Revenue, net of excise taxes, increased 5.7% year over year to $ 4,906 million.

The reported volumes of domestic cigarette shipments were down 0.4% year-over-year, mainly due to losses in retail market share, among other factors, partially offset by the growth rate of the industry as well as by trade inventory movements. After adjusting for movements in commercial inventories, domestic cigarette shipments of smoking products decreased by approximately 1%, while total domestic cigarette industry volumes increased by 1%. At the same time, the cigar shipment volumes reported by Altria improved by 10%.

During the quarter, the total retail share of cigarettes declined 0.3 percentage points to 49.4%. The sector’s adjusted OCI improved 9.9% to $ 2,823 million due to better pricing and lower costs, partially offset by higher promotional investments, increased resolution costs and larger tobacco and health related disputes. The adjusted OCI margin increased by 2.2 percentage points to 57.5%.

Oral tobacco products: Segment net revenues improved 3.2% year-over-year to $ 640 million, driven by higher pricing, somewhat offset by high promotional investments and shipping volumes reduced. Revenue, net of excise taxes, increased 3.4% to $ 607 million.

Domestic shipping volumes for the segment fell 1.1% due to timing differences as well as losses in retail market share, which in turn stem from increased sales of nicotine packets by lane. oral. This was partially offset by the growth rate of the industry, among other factors. On an adjusted basis, however, shipment volumes of oral tobacco products increased by approximately 4%. The share of total retail sales of oral tobacco products fell 2.4 percentage points to 49.9%.

Adjusted other comprehensive income increased 4.3% to $ 440 million due to improved pricing, partially offset by lower shipping volumes. The adjusted OCI margin increased 0.6 percentage point to 72.5%.

Wine: This segment has been largely affected by the pandemic, including the reduction in on-site sales as well as direct sales to consumers. Net revenue fell 6% year-on-year to $ 157 million due to reduced shipping volumes. Industry revenues, net of excise taxes, fell 6.2% to $ 152 million. Reported wine shipping volumes fell 3.9% to around 1.9 million cases. We note that the pandemic has affected the company’s wine business, which is expected to remain under pressure due to restrictions on meals and gatherings.

Category-adjusted OCIs increased 25% to $ 20 million, driven by lower selling and administrative expenses, partially offset by lower shipping volumes. The adjusted OCI margin increased 3.3 percentage points to 13.2%.

Financial updates

The company currently has an annualized dividend rate of $ 3.44 per share. Notably, the company maintains a long-term dividend payout ratio target of around 80% of adjusted EPS.

Altria ended the quarter with cash and cash equivalents of $ 4,123 million, long-term debt of $ 27,755 million and total equity of $ 3,232 million.

Other developments and advice

Altria incurred pre-tax charges in the amount of $ 50 million in the first nine months of 2020, related to COVID-19. These include costs related to personal protective equipment, salary increases and health examinations, among others. However, Altria noted that so far its tobacco business has not experienced any material disruption related to government restrictions on consumer movement and business operations. Most of the retail stores where the company’s products are sold (such as convenience stores) have been considered essential businesses and remain open.

In particular, Altria benefited from its non-combustible products. Incidentally, PM USA began marketing IQOS and HeatSticks as modified risk tobacco products, as cleared by the United States Food and Drug Administration (FDA). Additionally, PM USA expects IQOS to arrive in select convenience stores in Charlotte starting in November. Regarding on !, Helix expanded its distribution by an additional 16,000 stores in the third quarter. to! is available in 56,000 stores at the end of the third quarter. This reflects a sequential increase of 4% and more than triple the number from the previous year. In addition, on! achieved a 2.1 percentage point retail share of the oral tobacco category in the nine months ended September 30, 2020.

The company is now looking at adjusted earnings per share in the range of $ 4.30 to $ 4.38, indicating growth of 2-4% from $ 4.21 a year earlier. Previously, the net result was expected in a range of $ 4.21 to $ 4.38, which implied a growth of 0 to 4%.

The company now expects domestic cigarette industry volumes to grow in a range of zero to down 1.5% for 2020. Previously, the metric was expected to drop 2 to 3.5% year over year on the other. The updated guidance is based on the best industry trends since the start of the year and expectations of continued resilience in the cigarette category. However, the company continues to assess the macroeconomic impacts of the pandemic on adult tobacco users (ATCs), such as disposable income, unemployment rates and purchasing habits.

We note that shares of this company Zacks Rank # 3 (Hold) have fallen 10.4% in the past three months compared to the industry’s 7.4% decline.

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