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Altria (MO) Fights Volume Decline: Should You Hold the Stock?

Zacks Equity Research
Updated

Altria Group Inc. MO has been grappling with increased competition in the vapor category, declining volumes of cigarettes, strict anti-smoking regulations by governments globally and currency headwinds. However, its focus on unconventional tobacco products is likely to cushion the stock.

Although Altria marginally surpassed sales estimates in third-quarter 2016, we noted that it had posted lower-than-expected sales in the past five quarters prior to it. The main reason can be attributable to a general shift of consumption away from tobacco products.

In order to cater to the growing demand for less harmful tobacco products, Altria is offering several reduced risk tobacco products which helps it to maintain share. In collaboration with Okono A/S Altria developed innovative, non-combustible nicotine-containing products for adult smokers. Its flagship MarkTen e-cigarette brand and Green Smoke e-vapor products are some of the examples. Most of the company unconventional brands have gained market share during third-quarter 2016.

ALTRIA GROUP Price, Consensus and EPS Surprise

 

ALTRIA GROUP Price, Consensus and EPS Surprise | ALTRIA GROUP Quote

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Altria has always remained afloat amid declining volumes in the cigarette industry with the help of positive pricing. The company has combated unfavorable tax environment with price increases. The company has repeatedly raised prices of its cigarettes in the past. The regular market share gains by the company’s brands despite repeated price increase in several markets shows the company’s strong business model and strength of its key brands.

Altria’s stock price history reveals that it hasn’t disappointed for quite sometime. In fact, so far this year, the shares of this tobacco maker have risen 15.7%, outperforming the Zacks categorized Consumer Staples industry, which has showcased a gain of 1.8%.

 

 

Although the company maintains a leadership position in the tobacco market we notice that the tobacco industry in general is facing many challenges which have put margins under pressure. Governments worldwide are imposing restrictions on tobacco companies which in turn are lowering cigarette consumption. The U.K. and Australia governments have imposed regulations regarding plain packaging for cigarettes. Such actions negatively impact margins of the company.

However, the sinful nature of its products is an advantage for the stock. Tobacco sector in particular has always been interesting for investors, as these sinful stocks always yield handsome returns for the portfolio. Since people smoke both during times of recession as well as economic growth, such stocks are sometimes valued at a higher premium than companies that are more sensitive to economic trends. As a result, these stocks always benefit from the addictive nature of their products.

Zacks Rank & Stocks to Consider

Some better-ranked stocks in the broader consumer staples sector include Inter Parfums Inc. IPAR, US Foods Holdings USFD and Sysco Corporation SYY, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Inter Parfums Inc. has an expected earnings growth of 15%. US Foods has an expected earnings growth rate of 17.1%, while Sysco Corporation has a long-term growth rate of 8.8%.

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INTER PARFUMS (IPAR): Free Stock Analysis Report
 
SYSCO CORP (SYY): Free Stock Analysis Report
 
ALTRIA GROUP (MO): Free Stock Analysis Report
 
US FOODS HLDG (USFD): Free Stock Analysis Report
 
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Zacks Investment Research