Despite challenges stemming from weak cigarette sales, Altria Group, Inc. MO managed to stay afloat on rising popularity of low-risk tobacco alternatives. The company is focusing on expanding its presence in reduced risk products (RRPs) such as IQOS and other oral tobacco offerings. Additionally, strong pricing for tobacco products have been an upside for the company. Shares of the company have gained 11.5% in the past six months, almost in line with the industry’s rise of 11.7%. Let’s take a closer look at the factors aiding the performance of this Zacks Rank #3 (Hold) company.
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Low-Risk Products on the Rise
RRPs, known to be the next-generation tobacco products, have been gaining popularity owing to their less detrimental impacts on health. Like many tobacco biggies, Altria is also undertaking measures to expand in this arena. The marketing and technology sharing agreement between Altria and Philip Morris International Inc. PM, pertaining to the sale of IQOS in the United States, is noteworthy. IQOS is one of the leading RRPs in the industry. The FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020. Also, the FDA’s authorization regarding sale of IQOS 3 in the United States bodes well. Altria, through its subsidiary Philip Morris USA, Inc., is striving to make IQOS available across more stores in the United States. We note that other tobacco companies such as Turning Point Brands, Inc. TPB and British American Tobacco p.l.c. BTI have been expanding their offerings in the low-risk tobacco space.
Additionally, Altria has been undertaking efforts to expand oral tobacco offerings. The company, through its subsidiary Helix Innovations, has full global ownership of on! — a popular tobacco-derived nicotine (TDN) pouch product. Management believes that on! is a worthwhile addition to Altria’s smokeless portfolio as oral TDN products are gaining popularity in the United States owing to their low-risk claims. Notably, on! was sold in more than 93,000 stores by the end of first-quarter 2021. The company is also making efforts to expand in the cannabis industry. Markedly, it acquired stakes in the Canada-based cannabis company, Cronos Group.
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Strong Pricing a Big Support
Strong pricing for tobacco products has been a significant upside for Altria. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. During first-quarter 2021, higher pricing aided growth in revenues and adjusted operating companies income (OCI) in the oral tobacco product segment. Also, higher pricing contributed to the company’s smokeable category revenues, which was otherwise battered by weak shipment volumes. Consistent gains from pricing power are likely to keep supporting the company’s revenues in the forthcoming periods.
Soft cigarette sales have continued to be a major downside for Altria. During first-quarter 2021, the company’s domestic cigarette shipment volumes declined 12% year over year. This adversely impacted revenues in the company’s smokeable category. Additionally, the company expects 2021 cigarette industry volumes to be affected by factors like stay-at-home practices, purchasing patterns and the roll out of the coronavirus vaccine among others.
Despite such challenges, we expect the company to keep gaining from its focus on boosting low-risk offerings as well as strong pricing for tobacco products in the forthcoming periods.
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