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This Tobacco Company May Reap Strong Growth
Posted by: abirk (IP Logged)
Date: June 18, 2013 09:46AM

Altria Group (MO) is engaged in the manufacture and sale of cigarettes and certain smokeless products in the U.S. With 50% market share in the U.S. tobacco industry, the company dominates the market. Altria owns UST, the world's largest moist smokeless tobacco manufacturer by sales. UST provides Altria with the leading smokeless tobacco brands, Skoal and Copenhagen. The company's diversification into smokeless tobacco is crucial to promoting its growth due to the declining market for smokers in the U.S.

Altria, whose brands include top-selling Marlboro cigarettes, Skoal smokeless tobacco and Black & Mild cigars, also reaffirmed its 2013 full-year adjusted earnings forecast of between $2.35 and $2.41 per share. The company also owns a wine business, holds a voting stake in brewer SABMiller, and has a financial services division.

Philip Morris USA (PM USA) is Altria's domestic cigarette manufacturing company. Philip Morris remains the largest tobacco company in the United States by both revenue and volume.

Competitors

Altria's Philip Morris USA holds a 50% share of the U.S. tobacco market with a 60% share in the premium brand segment. Two significant competitors of Altria include Reynolds American (RAI) and Carolina Group’s Lorillard (LO). Reynolds American and Lorillard hold 29% and 10% of the market share, respectively. Each of Altria's two main domestic competitors has advantages and disadvantages. RAI produces more savings brands, making it likely to benefit from consumers' switching from premium to value brands. Lorillard's flagship cigarette Newport is by far the most popular brand of mentholated cigarettes. However, Altria's size and revenues put both of them at a relative disadvantage in terms of sheer heft in the industry. Both competitors are subject to the same external events, i.e. taxation, litigationand changes in popular attitudes about smoking.

Economic Downturns

Due to steep cigarette price rises some consumers have switched from premium brands to value or deep-discount brands. Most of Altria's cigarette brands are classified as premium, making it more sensitive to these shifts in consumption than some other tobacco companies with more equally distributed product lines.

Altria tries to manage the price gap between value and premium cigarettes by keeping their wholesale prices at a level high enough to be profitable but not so high that consumers start switching to value brands. Cost-conscious consumers may stop smoking or downgrade to a value-priced brand during economic slumps, but most consume the same brands at the same, or slightly lower, level. As a result, Altria and other similar companies generally experience less of a decrease in revenues during recessions than the economy as a whole.

Financials and Growth Opportunities

Altria Group Inc. is launching its first electronic cigarette under the MarkTen brand in Indiana starting in August and expanding its smokeless product offerings. It is diversifying beyond the traditional cigarette business, which has become tougher in the face of tax hikes, smoking bans, health concerns and social stigma. MarkTen is a disposable e-cigarette but can be reused by buying a separate battery recharging kit and additional cartridges in both tobacco and menthol flavours. The company said the e-cigarette's "Four Draw" technology is designed to give users a "more consistent experience" that closely resembles the draw of a traditional cigarette. Like other tobacco companies, Altria also is focusing on cigarette alternatives for future sales growth because the decline in cigarette smoking is expected to continue.

The company boasts of a strong product portfolio including its flagship brand Marlboro which approximately makes up to 85% to total cigarette volume sales of the company. With impressive top and bottom line growth of 6% and 7%, respectively, on average in the recent five years, it is expected that there will be growth rate of 7.5% on an average in the coming five years.

Altria has increased its dividend for the last 44 years. The dividend growth rate has been about 11.4% for the last decade. Reported revenues for MO during the first quarter of 2013 were $5.5 billion. MO recorded a 21% increase in gross profit and 30% surge in operating income in the recent quarter due to continual cost savings and cost reduction program.

MO also offers a high dividend yield of 4.9% with an annualized dividend rate of $1.76 per share. MO repurchased $57 million worth of shares at an average price of $34.05 per share. Altria’s strengths include a most diverse business model among U.S. tobacco peers, leading premium tobacco brands, a systematic approach to innovation, including new products, well-developed capabilities to address legislation, regulation and litigation challenges, proven cost management and a strong balance sheet that supports excellent cash returns to shareholders, primarily through dividends.

The diversity of Altria’s tobacco businesses and the successful execution of their strategies helped Altria earn approximately 52% of the combined tobacco profit pool in 2012. Last year, Altria Client Services entered into an agreement with Okono, an affiliate of the Danish company Fertin Pharma to develop innovative, non-combustible nicotine-containing products. Okono and another Altria subsidiary also formed a joint venture, Richmark, to market and sell these kinds of products outside the U.S. and Canada.

Altria increased its dividend by 7.3% in 2012. Altria has increased its dividend 46 times in the last 43 years. The company recorded 3.5% growth in full-year revenue and saw its diluted EPS jump 25% year over year. PMMC, Altria's financial subsidiary is also cutting down on costs; a move that will inescapably lure in long-term investors. Over the last four years, it has managed to reduce its costs by $1 billion.

To End

Altria has a reputation as an income investor's staple. It has been inculcating in shareholder-friendly policies and is expected to provide value for investors. It has a record of healthy operating cash flows. The venture of the company into e-cigarettes will support growth in the near future.

Altria’s tobacco companies are well-positioned in the U.S. tobacco space. They have the leading positions in the largest and most profitable tobacco product categories. And in each of these categories, Altria competes with premium brands that enjoy strong equity and higher margins than most of their competitors. For decades, the company has pumped out steady profit growth and returned a great deal to shareholders.


Stocks Discussed: MO, RAI, LO,
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