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The growing demand for non-family products to achieve Altria's performance in the fourth quarter




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A man displays his Juul electronic cigarette at a grocery store in Hoboken, NJ, on Thursday, December 20, 2018. Altria, one of the largest tobacco companies in the world, spends almost $ 13 billion to buy a huge stake in the Jupe Juul as a cigarette still decreases. (AP Photo / Julio Cortez) photo credit: ASOCIATED PRESS

Altria Group Inc. (NYSE: MO), one of the largest tobacco companies in the world, will publish its results for the fourth quarter of 2018 on 31 January 2019. The market expects the company to report net income (excluding excise duty) of 4.82 billions of dollars, 2.3% higher y / y. Adjusted quarterly earnings should be $ 0.95 per share compared to $ 0.91 per share a year ago. Higher EPS is probably the result of higher prices for tobacco products, growth in the segment of cadmium products and a better insurance mix in the wine category.

We have a price estimate of $ 61.65 per company's share that is higher than its current market price. Our detailed estimates of Altria's key drivers that affect its estimated cost are available on our interactive panel – How will Altria Group Inc. be at the end of 2018? You can make changes to our assumptions to arrive at a company's own pricing.

Trefis

Key factors affecting Q4 results

  • Decrease in the segment of smokable products: As the young generation does not take up a large number of cigarettes, the demand for flammable products has seen a steady decline in the US in recent years. This is reflected in the year-on-year decrease in the volume of cigarette transport in households by 6.3% in the nine months ended September 30, 2018. During the same period domestic cigarette industry volumes decreased by 4.5% compared to the previous year. We expect this trend to continue in the fourth quarter of 2018, with segment sales reaching $ 5.5 billion, down 8.8%, while a year-on-year increase of 4.2% will be driven by higher prices and lower consumer spending tax.
  • Marlboro brand: The Marlboro Altria brand continues to be the number one in the US, accounting for 43.2% of the tobacco market in the country. The addictive nature of cigarettes reduces the price flexibility of the product. Although Marlboro's retail share declined by 30 basis points to 43.2% in the third quarter of 2018 due to the continuing effects of the California tax, Altria as a company had a market share of 50.2% on the cigarette market in the same period. Given the market share of Marlboro, it is less sensitive to price increases than other brands. This would help the company grow despite the drop in the volume of cigarettes sold.
  • Increased focus on the seamless segment: Due to the decrease in smoking in the USA, Altria has made a serious effort to increase its share of the smoke-free category. Another focus on e-cigarettes and other non-flammable products has led to greater diversity of company offers. As a result, Altria's share of smoker segment decreased significantly from 91.0% in 2010 to 86.5% in 2017. On the other hand, the share of the seamless segment grew from only 6.0% in 2010 to 10.0% in 2017. The recent major investment decisions (Cronos and JUUL) will help Altria increase the share of non-GM products further and lead to higher and steady revenue growth.
  • Growth of the wine segment: Net wine yields grew by 3.8% in the first nine months of 2018. This was mainly due to higher volume of transport and a favorable premium mix. We expect the trend to continue. The fourth quarterly is generally considered the best quarter for the segment due to the holiday season, the Christmas and New Year holidays. It is expected that this will mean a year-on-year increase in revenue from this segment by 11%.

Outlook for FY 2018

For the full year of 2018, we expect revenue (excluding VAT) to increase to $ 19.7 billion, 1.1% more than $ 19.5 billion in 2017. This would be primarily due to an increase in the wingless category by more than 8.4% on the basis of higher deliveries and prices, as demand for young adults for products in this category is increasing. Revenue from wine is expected to increase by about 6.1% due to higher volumes, premium prices and a stronger fourth quarter due to the holiday season, Christmas and New Year holidays. However, the segment of smokable products, which contributes most to Altria's revenue, is expected to remain at the year-on-year level due to lower demand and lower transport volumes.

Altria's net margin is expected to drop to 36.1% in 2018 from 40.0% in 2017. In the Smokeable Products segment, the margin would decrease year-on-year due to lower transport volumes, higher costs associated with strategic initiatives and increased tobacco and health disputes, which are slightly offset by higher prices. The segment of cadmium-free products would contribute most to the margin due to better pricing, higher volumes and lower costs through consolidation. It is expected that the wine segment will lead to a reduction in net margins for the company in 2018. Wine is likely to see a significant drop in margins, mainly due to higher general and administrative costs due to one-off employee emoluments reported during the year.

Share price support

In the third quarter of 2018, Altria announced two major investment decisions that would benefit the company in the long run. Altria announced the acquisition of a 45% stake in Cronos Group, the world's leading Cannabino company. It comes at a time when the interest in marijuana is growing among young adults, between the legalization of recreational marijuana in many US and Canadian states, as well as the increasing use of cannabis for medical purposes. In December 2018, Altria also announced its decision to acquire 35% in JUUL Labs Inc. A 35% stake in the company, accounting for ~ 30% of the total US electronic vapor category, will help Altria to complement its non-flammable bidding for a non-smoke category. Together with the investment in the Cronos Group, Altura's investment in JUUL is expected to strengthen its financial profile and strengthen its future growth prospects. Altria also initiated a cost-cutting program that would save $ 500- $ 600 million a year by the end of 2019 by reducing third-party spending on corporate and workforce reductions that would likely lead to increased margins in 2019.

In 2018 Altria increased its quarterly dividend by 21.2% since the beginning of the year. The current annual dividend has risen to $ 3.20 per share. In addition, the $ 1.0 billion redemption program, announced in January 2018, doubled to $ 2.0 billion in May 2018. In the first nine months of 2018, Altria bought shares worth almost $ 1.3 billion. We therefore believe that the two major strategic investment decisions of Cronos and JUUL, together with improved dividend payouts and share repayment, would provide good support for Altria's share price.

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A man displays his Juul electronic cigarette at a grocery store in Hoboken, NJ, on Thursday, December 20, 2018. Altria, one of the largest tobacco companies in the world, spends almost $ 13 billion to buy a huge stake in the Jupe Juul as a cigarette still decreases. (AP Photo / Julio Cortez) photo credit: ASOCIATED PRESS

Altria Group Inc. (NYSE: MO), one of the largest tobacco companies in the world, will release its fourth quarter 2018 results on 31 January 2019. The market expects the company to report net income (excluding excise duty) of $ 4.82 billion dollars, 2.3% higher than yoy. Adjusted quarterly earnings should be $ 0.95 per share compared to $ 0.91 per share a year ago. Higher EPS is probably the result of higher prices for tobacco products, growth in the segment of cadmium products and a better insurance mix in the wine category.

We have a price estimate of $ 61.65 per company's share that is higher than its current market price. Detailed estimates of Altria's key drivers that affect its cost estimates are available on our interactive panel – How will Altria Group Inc End 2018 be? You can make changes to our assumptions to arrive at a company's own pricing.

Key factors affecting Q4 results

  • Decrease in the segment of smokable products: As the young generation does not take up a large number of cigarettes, the demand for flammable products has seen a steady decline in the US in recent years. This is reflected in the year-on-year decrease in the volume of cigarette transport in households by 6.3% in the nine months ended September 30, 2018. During the same period domestic cigarette industry volumes decreased by 4.5% compared to the previous year. We expect this trend to continue in the fourth quarter of 2018, with segment sales reaching $ 5.5 billion, down 8.8%, while a year-on-year increase of 4.2% will be driven by higher prices and lower consumer spending tax.
  • Marlboro brand: The Marlboro Altria brand continues to be the number one in the US, accounting for 43.2% of the tobacco market in the country. The addictive nature of cigarettes reduces the price flexibility of the product. Although Marlboro's retail share declined by 30 basis points to 43.2% in the third quarter of 2018 due to the continuing effects of the California tax, Altria as a company had a market share of 50.2% on the cigarette market in the same period. Given the market share of Marlboro, it is less sensitive to price increases than other brands. This would help the company grow despite the drop in the volume of cigarettes sold.
  • Increased focus on the seamless segment: Due to the decrease in smoking in the USA, Altria has made a serious effort to increase its share of the smoke-free category. Another focus on e-cigarettes and other non-flammable products has led to greater diversity of company offers. As a result, Altria's share of smoker segment decreased significantly from 91.0% in 2010 to 86.5% in 2017. On the other hand, the share of the seamless segment grew from only 6.0% in 2010 to 10.0% in 2017. The recent major investment decisions (Cronos and JUUL) will help Altria increase the share of non-GM products further and lead to higher and steady revenue growth.
  • Growth of the wine segment: Net wine yields grew by 3.8% in the first nine months of 2018. This was mainly due to higher volume of transport and a favorable premium mix. We expect the trend to continue. The fourth quarterly is generally considered the best quarter for the segment due to the holiday season, the Christmas and New Year holidays. It is expected that this will mean a year-on-year increase in revenue from this segment by 11%.

Outlook for FY 2018

For the full year of 2018, we expect revenue (excluding VAT) to increase to $ 19.7 billion, 1.1% more than $ 19.5 billion in 2017. This would be primarily due to an increase in the wingless category by more than 8.4% on the basis of higher deliveries and prices, as demand for young adults for products in this category is increasing. Revenue from wine is expected to increase by about 6.1% due to higher volumes, premium prices and a stronger fourth quarter due to the holiday season, Christmas and New Year holidays. However, the segment of smokable products, which contributes most to Altria's revenue, is expected to remain at the year-on-year level due to lower demand and lower transport volumes.

Altria's net margin is expected to drop to 36.1% in 2018 from 40.0% in 2017. In the Smokeable Products segment, the margin would decrease year-on-year due to lower transport volumes, higher costs associated with strategic initiatives and increased tobacco and health disputes, which are slightly offset by higher prices. The segment of cadmium-free products would contribute most to the margin due to better pricing, higher volumes and lower costs through consolidation. It is expected that the wine segment will lead to a reduction in net margins for the company in 2018. Wine is likely to see a significant drop in margins, mainly due to higher general and administrative costs due to one-off employee emoluments reported during the year.

Share price support

In the third quarter of 2018, Altria announced two major investment decisions that would benefit the company in the long run. Altria announced the acquisition of a 45% stake in Cronos Group, the world's leading Cannabino company. It comes at a time when the interest in marijuana is growing among young adults, between the legalization of recreational marijuana in many US and Canadian states, as well as the increasing use of cannabis for medical purposes. In December 2018, Altria also announced its decision to acquire 35% in JUUL Labs Inc. A 35% stake in the company, accounting for ~ 30% of the total US electronic vapor category, will help Altria to complement its non-flammable bidding for a non-smoke category. Together with the investment in the Cronos Group, Altura's investment in JUUL is expected to strengthen its financial profile and strengthen its future growth prospects. Altria also initiated a cost-cutting program that would save $ 500- $ 600 million a year by the end of 2019 by reducing third-party spending on corporate and workforce reductions that would likely lead to increased margins in 2019.

In 2018 Altria increased its quarterly dividend by 21.2% since the beginning of the year. The current annual dividend has risen to $ 3.20 per share. In addition, the $ 1.0 billion redemption program, announced in January 2018, doubled to $ 2.0 billion in May 2018. In the first nine months of 2018, Altria bought shares worth almost $ 1.3 billion. We therefore believe that the two major strategic investment decisions of Cronos and JUUL, together with improved dividend payouts and share repayment, would provide good support for Altria's share price.

What's behind Trefis? See how new collaboration works and what happens

For CFOs and financial groups | | Product, research and development and marketing teams

More Trefis Research

Like our charts? Explore examples of interactive panels and create your own.


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