Tobacco giant Altria Group Inc.'s (MO, Financial) increasing unpopularity could create a turnaround opportunity. The company’s stock has fallen 5% in the last year, trading with an appealing valuation given its growth prospects.
The recent investments it has made in startup e-cigarette company Juul could shift its focus toward market segments that offer stronger growth potential than cigarettes. Along with greater innovation in existing products, this could strengthen its financial outlook.
Although it has underperformed the S&P 500 in the last year, the stock could offer investment appeal for the long term.
Juul investment
Altria’s recent acquisition of a 35% stake in Juul could catalyze its growth, providing it access to a fast-growing market. Annual data shows the number of adults who vape in the U.S. increased 25% to 15 million between February 2018 and February 2019. This contributed to 40% volume growth in the e-vapor category in the first quarter. Since Juul is the dominant e-vapor brand with a 40% market share in the U.S., its shipment volume in the first quarter increased 175% versus the prior-year quarter.
Juul offers international growth prospects, with retail takeaway at stores in Canada that sell its products growing to a dollar share of over 80%. This was up from 60% in December. In the U.K., the company's dollar share increased to 27% from 23% at retail chain Sainsbury’s (JSAIY, Financial) between January and March. The company's products are now available in 10 countries, including the U.S., and is expected to launch in additional countries over the next couple of years. The company also plans to test new products, such as a Bluetooth-enabled device. Increased innovation may further differentiate its products from those of rivals, leading to a competitive advantage that ultimately benefits Altria.
Innovation
Altria recently introduced a number of innovative features to enhance the growth prospects of its Marlboro brand. For instance, it introduced reseal pack technology, which is the company’s most significant cigarette packaging innovation since it released the flip top box. Further packaging changes are expected to take place as consumers have had a positive reaction to the new features so far.
There are also plans to expand the distribution of the Marlboro Smooth Ice brand, which is a menthol cigarette. Distribution to an initial 110,000 stores started last month. The popularity of the recently launched Marlboro Rewards loyalty program was higher than expected as over 1.6 million customers have enrolled in the program. This could strengthen customer loyalty and improve the brand’s position relative to competitors.
Risks
Global cigarette volumes continue to fall, with Altria reporting a 5% decline in its most recent quarter. This trend is expected to continue over the long run, with the company forecasting an average annual decline in cigarette volumes of between 4% and 5% over the next five years. Since the company generated 88% of its revenue from smokable products, including cigarettes, in 2018, declining volumes may force it to increase prices. While this may offset the losses in the near term, it could lead to a faster rate of volume decline in the long run as customers reduce consumption due to higher costs.
As well as investing heavily in the e-vapor segment, Altria is attempting to overcome declining cigarette volumes through an efficiency program. It is on track to deliver around $575 million in annualized cost savings by the end of 2019.
Outlook
For the next fiscal year, Altria is guiding for 7% earnings per share growth. Since the stock trades with a price-earnings ratio of 13, it appears to offer good value.
The investment the company has made in Juul could provide it with access to a highly popular and relevant market that is seeing strong growth. The startup’s dominant position in e-vapor could strengthen Altria’s growth rate.
Similarly, further innovation of its key Marlboro brand could strengthen its position among consumers, leading to increased scope to raise prices in order to offset volume declines.
Although the stock has underperformed the S&P 500 by 16% in the last year, it offers recovery potential as it delivers its growth strategy.
Read more here:
- Why Visa Is a Buy
- Why Home Depot Stock Could Beat the S&P 500
- Why Starbucks Has Upside After 33% Surge
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
