Altria Group (MO, Financial) 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 U.S. by both revenue and volume.
Altria has been a huge winner over the past half-century, having survived countless regulatory threats, lawsuits, and public campaigns to reduce tobacco use and cut into its core business. Even though cigarette smoking has become less popular over that span, Altria and its peers have managed to keep profiting from the industry.
Rapid Growth
It is well known that Altria owns a near 30% economic interest in SABMiller. However, what investors often fail to realize is how much this holding is worth to Altria and how much SAB has contributed to Altria's growth over the past few years.
What many investors fail to realise is the fact that Altria's holding in SAB is actually one of the fastest growing parts of the group. Specifically, since 2008 Altria's annual income from its share of SAB has jumped from $467 million to $991 million as reported during 2013; a compounded annual growth rate of 16.2%.
In comparison, Altria's income from smokeable products has grown at a compounded annual growth rate of 4.2%. If Altria's income from SAB continues to expand a 16.2% per year, income from the holding will begin to rival cigarettes as Altria's main income source with a decade. What's more, considering the fact that Altria's initial investment in SAB was $6.5 billion, an income of $991 million for fiscal 2013 indicates an annualized return on investment of 15.2% -- not bad.
Bright spot
The European Union region remains an important market for Philip Morris, as it contributes almost one-third of the company's consolidated operating income. In the past, Philip Morris had struggled to deliver satisfactory performance in the EU; however, it seems things there have recently started to turn in its favor. In the first quarter of 2014, operating income in the EU region for Philip Morris increased by 4.3% year-over-year to $978 million in the first quarter of 2014. Also in the quarter, sales volume dropped by only 2.9% for Philip Morris in the region, better than the average industry sales volume decline of 5.9%.
In another positive takeaway from the first-quarter results, the company's market share in the EU region increased by 0.90 basis points to 38.9%. Investors could see this as an early sign of an improvement in the region's operating environment. Also, the EU has increased its focus on the prevention of illicit trade and this likely augurs well for industry volumes and the performance of the company in the future.
The Asia region, which offers growth potential due to a growing population and increasing income, has been an important market for Philip Morris. Asia contributes almost 30% of the company's consolidated operating income. Asia has historically been important for the company's profit growth; however, in the recent past, the operating environment has been challenging in some key Asian markets, including Japan and Indonesia.
Philip Morris is efficiently trying to counter the pressure on its market share in Japan by accelerating investment, mainly in innovation, modernization of products, and brand building. The company's 'Be Marlboro' campaign', which it initiated in the first quarter of 2014 in Japan, has received a positive response at the consumer level. The efforts undertaken by Philip Morris in Japan to strengthen its performance are likely to put pressure on the company's margins in the short term; however, they will help the company stabilize its market share and return to growth in the long term.
To End
Presenting findings from a study of almost 6,000 smokers over five years, the researchers said the results suggest e-cigarettes could play an important role in reducing smoking rates and hence cutting tobacco-related deaths and illnesses......."E-cigarettes could substantially improve public health because of their widespread appeal and the huge health gains associated with stopping smoking," said Robert West of University College London's epidemiology and public health department, who led the study.
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 continues to show great potential and still has several relative advantages over its competitors, including its dominance in cigarette market share, high dividend yield and diversification with other assets.
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.
