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Altria (MO) Down 0.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Altria (MO). Shares have lost about 0.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Altria due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Altria's Q1 Earnings Top Estimates, Guidance Withdrawn

Altria Group released first-quarter 2020 results, wherein both top and bottom lines increased year over year and beat the Zacks Consensus Estimate. However, management withdrew its 2020 earnings guidance owing to the uncertainty related to COVID-19.

Adjusted earnings came in at $1.09 per share, which rose 18.5% year over year and beat the Zacks Consensus Estimate of 97 cents. The uptick can be attributed to increased adjusted operating companies income (OCI) in the smokeable and oral tobacco product segments along with a reduced number of outstanding shares. This was somewhat offset by a decrease in adjusted earnings from the company’s equity investment in AB InBev.

Net revenues advanced 13% year over year to $6,359 million. Revenues, after deducting excise taxes, grew 15% to $5,046 million. The consensus mark was $4,619 million. Revenues were backed by strength in the smokeless and oral tobacco product segments.

Gross profit in the quarter advanced 2.2% to $2,873 million from the prior-year quarter. Notably, reported OCI increased 4.7% to $2,400 million and operating income rose 4.4% to $2,336 million.

Segment Details

Smokeable Products: Net revenues in the category rose 13.6% year over year to $5,606 million due to greater shipment volumes and higher pricing. Revenues, net of excise taxes, grew 16% year over year to $4,328 million.

Reported domestic cigarette shipment volumes climbed 6.1% year over year owing to trade inventory movements, consumers’ stockpiling amid the coronavirus-led crisis and calendar differences. This was partly offset by the cigarette industry’s rate of decline and retail share losses. During the quarter, the company’s total cigarette retail share declined 0.7 percentage point to 49.2%. On an adjusted basis, however, smokeable products’ domestic cigarette shipment volumes fell approximately 5% and total domestic cigarette industry volumes declined an estimated 3.5%.

Meanwhile, Altria’s reported cigar shipment volumes rose 13.1%. Adjusted OCI in the segment improved 20.1% to $2,392 million, owing to better pricing and increased shipment volumes. Adjusted OCI margins rose 2 percentage points to 55.3%.

Oral Tobacco Products: Net revenues in the segment improved 11.3% from the year-ago quarter to $601 million, driven by higher pricing and shipment volumes. Revenues, net of excise taxes, increased 12% to $570 million in the quarter.

Domestic shipment volumes for the segment grew 2.8% due to the industry’s growth rate, calendar differences as well as retail and consumer stock hoarding amid the pandemic. This was partly offset by retail share losses and wholesale inventory trade movements. On an adjusted basis, however, oral tobacco products shipment volumes dipped an estimated 0.5%. Total oral tobacco products’ retail share went down 2.8 percentage points to 50.4%.

Adjusted OCI rose 13.4% to $416 million, owing to improved pricing and shipment volumes, somewhat negated by elevated costs. Adjusted OCI margin expanded 0.9 percentage points to 73%.

Wine: Net revenues fell 3.3% year on year to $146 million due to lower shipment volumes. This was somewhat compensated by improved pricing and mix. The segment’s revenues, net of excise taxes, dipped 2.7% to $142 million. Reported wine shipment volumes dropped 10.2% to about 1.7 million cases.

Adjusted OCI in the category declined 13.3% to $13 million, resulting from escalated selling, general and administrative costs and reduced shipment volumes. Higher pricing and improved mix offered some respite. Adjusted OCI margin contracted 1.1 percentage points to 9.2%.

Financial Updates

Altria did not repurchase any shares during the first quarter and borrowed the entire $3 billion under its revolving credit facility. Additionally, management suspended the company’s share buyback plan of $1 billion, which had a balance of $500 million. Altria anticipates maintaining a higher cash balance in the coming quarters to protect its financial flexibility.  Capital expenditures in 2020 are now envisioned in the range of $200-$250 million, down from the previous forecast of $225-$275 million.

Other Developments & Guidance

The company reopened its Richmond Manufacturing Center under improved safety measures. Consequently, all of the company’s manufacturing facilities are now operational amid the coronavirus outbreak. Till now, the company has not witnessed any material impacts of the outbreak on its supply chain or distribution systems. Also, it hasn’t experienced any material disruptions related to the government’s restrictions on consumer movements and business operations. However, given the uncertainty around the pandemic, management withdrew its 2020 adjusted earnings per share view. It also withdrew its compounded annual adjusted earnings growth guidance for 2020-2022.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -7.11% due to these changes.

VGM Scores

At this time, Altria has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Altria has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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