While persistently declining cigarette sales
volumes are denting Altria Group, Inc.âs MO
performance, the companyâs strategic pricing and growth efforts in
the low-risk products arena bode well. Well, such prudent
initiatives are enabling this well-known tobacco player to enhance
profitability and strengthen portfolio. Letâs take a closer look at
some of the factors aiding the company and see if it can cushion
the hurdles.
Bright Prospects in Smokeless Products
Tobacco companies are increasingly placing their bets on reduced
risk products (RRPs) such as e-cigarettes that are scientific
alternatives for cigarettes. Altria is making remarkable strides in
this realm and has introduced several RRPs that are included in the
companyâs smokeless category. Its flagship MarkTen and Green Smoke
e-vapor products are performing well. Also, the marketing and
technology sharing agreement between Altria and Philip Morris PM,
which is currently under FDA review, is expected to boost their
respective businesses.
Recently, Altria acquired 35% stake in JUUL, which is renowned for
advanced and highly differentiated e-vapor products. Altria plans
to provide JUUL greater exposure among adult smokers by providing
inserts in cigarette packs and extended logistics along with
distribution support. Moreover, Altria announced the completion of
investment in the Canadian cannabis company, Cronos Group Inc.
CRON, a few days ago. Cannabis-infused products are increasingly
being viewed as a recreational option. The deal is likely to
augment Altriaâs offerings in low-risk tobacco space. This will
enable the company to explore growth prospects in the nascent but
booming cannabis arena.
Pricing & Savings Efforts Bode Well
Strong pricing has helped the company to boost revenues. In
fourth-quarter 2018, higher pricing boosted performance in the
smokeable and smokeless segments. In fact, solid cigarette pricing
helped cushion the impact of weak volumes in the smokeable segment.
The company continues to envision product pricing to be the vital
driver in revenue expansion.
Additionally, in December 2018, the company revealed a
cost-reduction program aimed at delivering annualized cost savings
of nearly $575 million by the end of 2019. Along with cost
minimization across several platforms, the program is aimed to
reduce workforce and third-party spending. Savings generated from
the initiative will be mainly utilized for lowering interest
expenses associated with the investments in JUUL and Cronos.
Declining Cigarette Sales is a
Roadblock
Declining cigarette sales volumes, stemming from fading consumer
enthusiasm and regulatory hurdles, have been marring Altriaâs
performance for a while. During fourth-quarter 2018, domestic
cigarette shipment volumes fell 4.4% year over year. Prior to this,
cigarette shipment volumes declined 3.7%, 10.6% and 4.2% in the
third, the second and the first quarters of 2018,
respectively.
Such factors have lowered investorsâ optimism in the stock, which
declined 6.4% in the past three months compared with the industryâs
fall of 0.5%. Apart from Altria, declining cigarette sales volumes
are hurting other tobacco players like Philip Morris and British
American Tobacco BTI.
Amid such a scenario, the companyâs gradual expansion in other
business areas, such as RRPs, is expected to offer respite to a
certain extent. This combined with higher cigarette pricing
strategies is likely to drive growth. Moreover, the companyâs
bottom-line view for 2019 is encouraging. Going ahead, we expect
such upsides to aid a turnaround in this Zacks Rank #3 (Hold)
companyâs performance.
You can see the complete list of todayâs Zacks #1 Rank
(Strong Buy) stocks here.
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Philip Morris International
Inc. (PM) : Free Stock Analysis Report
Altria Group, Inc. (MO) :
Free Stock Analysis Report
British American Tobacco
p.l.c. (BTI) : Free Stock Analysis Report
Cronos Group Inc. (CRON) :
Free Stock Analysis Report
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