Altria Group, Inc. (MO) is in a favorable position due to its range of smoke-free products and pricing power. The company’s resilient performance in the second quarter of 2023 demonstrated its ability to navigate cost inflation and declining cigarette volumes.
Altria’s pricing power has allowed it to remain steady despite lower cigarette shipment volumes. While higher prices may result in decreased cigarette consumption, smokers tend to absorb price increases due to the addictive nature of cigarettes. In the second quarter of 2023, higher pricing contributed to the strength of Smokeable Products and Oral Tobacco categories, offsetting the impact of lower volumes and boosting adjusted operating companies income (OCI) in both segments.
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Embracing Smoke-Free Products
Consumers are increasingly shifting towards reduced-risk products (RRPs) and smoke-free alternatives due to the health risks associated with smoking cigarettes. Altria has responded to this market shift by offering oral tobacco, e-vapor, and heated tobacco products. In the second quarter of 2023, net revenues in the Oral Tobacco Products segment rose 2.3% year over year to $680 million.
Altria’s subsidiary, Helix Innovations, owns on! – a popular tobacco-derived nicotine (TDN) pouch product gaining popularity due to its low-risk claims. Altria is expanding the manufacturing capacity and commercial availability of on!. In the second quarter, on! reported a shipment volume growth of approximately 50%.
Within the smoke-free category, Altria is actively exploring strategies to compete in the e-vapor market. According to the second-quarter earnings call, e-vapor remains the largest smoke-free category in the United States, as it has been successful in enticing smokers away from traditional cigarettes. Altria’s acquisition of NJOY Holdings, particularly the NJOY ACE product with FDA marketing authorization, is significant in this regard. The company completed the buyout of NJOY Holdings, Inc on June 1, 2023, and plans to implement a commercial agenda for NJOY in the second half of 2023.
Concerns Over Cigarette Volumes
Altria acknowledges the challenges facing the overall cigarette industry due to the inflationary environment and changes in consumer spending patterns. Economic factors such as inflation, interest rates, supply chain disruptions, and purchasing patterns impact cigarette volumes. Rising health consciousness and the shift towards low-risk alternatives have also affected cigarette volumes. In the second quarter of 2023, net revenues in the Smokeable Products segment declined 30.9% year over year to $5,820 million due to reduced shipment volumes and increased promotional investments, partially compensated by higher pricing.
Domestic cigarette shipment volumes experienced a decline of 8.7%, primarily due to industry decline rates and retail share losses. The decline in the industry and retail share losses were influenced by macroeconomic pressures on disposable income. Adjusted for trade inventory movements and other factors, the estimated total domestic cigarette industry volume decreased by approximately 7.5%.
Altria is well-positioned to overcome headwinds related to cigarette volumes by leveraging its pricing strategies and strong portfolio of smoke-free products. The company expects adjusted EPS in the range of $4.89-$5.03 for the full year 2023, indicating growth of 1-4% compared to 2022. While Altria’s stock has experienced a 2.6% decline in the past year, it remains a solid choice in the consumer staple industry.
Solid Consumer Staple Bets
Consider looking into other strong consumer staple companies:
Post Holdings (POST): A consumer-packaged goods holding company with a Zacks Rank #1 (Strong Buy) and a trailing four-quarter earnings surprise of 59.6% on average.
Inter Parfums (IPAR): A fragrance and fragrance-related product manufacturer, marketer, and distributor with a Zacks Rank #1 and an expected EPS growth rate of 15% for three to five years.
Helen of Troy (HELE): A provider of various consumer products with a Zacks Rank #2 (Buy) and an expected EPS growth rate of 8% for three to five years.
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