Receeding cigarette sales volumes have been adversely impacting the performance of tobacco industry players. Nevertheless, companies like Altria Group, Inc. MO are striving to make up for the lost grounds on the back of pricing gains as well as growth in oral tobacco and other reduced risk products. Let’s discuss.
Low Risk Products & Oral Tobacco are Doing Well
Low-risk tobacco or smokeless products are gaining popularity owing to their less detrimental impacts on health. The trend has been aiding growth in the company’s oral tobacco category. During second-quarter 2020, revenues in the unit increased 9.6% from the year-ago quarter’s levels, driven by greater pricing and shipment volumes.
Markedly, Altria has undertaken noteworthy efforts to boost presence in the low risk tobacco space. The marketing and technology sharing agreement between Altria and Philip Morris PM, pertaining to the sale of IQOS in the United States, is yielding. In fact, the FDA approved the marketing of IQOS and HeatSticks as Modified Risk Tobacco Products in July 2020, which is likely to bolster the product’s sales. Other tobacco companies such as Turning Point Brands TPB and British American Tobacco BTI are also expanding their offerings in the reduced risk tobacco space.
Apart from this, Altria (through its subsidiary Helix Innovations) holds 80% stake in certain companies of Burger Group that is engaged in the commercialization of the oral tobacco-derived nicotine pouch product — on! Notably, on! was sold in more than 40,000 stores by the end of the second quarter of 2020, up 43% from first-quarter levels. Altria is also undertaking efforts to expand in the cannabis industry, evident from the acquisition of stakes of the Canada-based cannabis company, Cronos Group.
Pricing is a Key Upside
Pricing power is supporting Altria’s adjusted operating income even in the face of the unfavorable tax environment and declining cigarette volumes. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases due to the addictive quality of cigarettes.
During second-quarter 2020, higher pricing boosted Altria’s adjusted OCI in both smokeable and oral tobacco product segments. This also supported the company’s bottom line, which inched up 0.9% in the said quarter.
Smokeable & Wine Categories Lack Sheen
Consumers rising health consciousness, stringent regulations surrounding cigarette sales and anti-tobacco campaigns have clouded cigarette sales volumes. Altria is no exception to this downtrend and the struggle is well depicted on second-quarter 2020 top line.
Net revenues dropped 3.8% year over year, during the second quarter. The decline was mainly caused by softness in the smokeable products category, which fell 4.3% year over year due to reduced shipment volumes. The company’s cigarette unit is expected to stay gloomy in 2020. In fact, the company expects the domestic cigarette industry’s adjusted volumes to decline 2-2.5% for the year.
Moreover, we note that the coronavirus pandemic hurt the company’s wine business. In second-quarter 2020, net revenues in this segment fell 20.6% year on year, while wine shipment volumes dropped 20.2%. The wine business is likely to stay under pressure due to restrictions on social gatherings.
Clearly headwinds in the smokeable and wine businesses are a concern for Altria. Nevertheless, continued gains from pricing and growth in oral tobacco are encouraging. Such aspects are likely to work in favor of this Zacks Rank #3 (Hold) company. The stock has gained 2.6% in the past six months compared with the industry’s rise of 4.4%.
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