Seeking Alpha
Long/short equity, newsletter provider, valuentum
Profile| Send Message|
( followers)  

Altria (NYSE:MO) reported solid second-quarter results. Though Altria's revenue fell nearly 3% (down 1.2% net of excise taxes), the firm was able to drive operating earnings expansion of 6.6% thanks to a combination of strong pricing and cost-cutting initiatives. The cigarette maker's second quarter adjusted diluted earnings per share advanced 5.1% to $0.62, as all three of the firms' divisions drove 'operating companies income' and margin expansion during the period.

Adjusted 'operating companies income' at its 'Smokeable Products' division nudged higher, but only because cigarette price increases stuck. Its total retail cigarette share grew during the quarter, but industrywide headwinds were massive as the firm's domestic cigarettes shipment volume declined 6.7% (down 3.5% after adjusting for changes in trade inventories). Shipment volume of Marlboro cigarettes fell over 7%. Altria's 'Smokeless Products' segment, on the other hand, revealed a significant improvement in adjusted 'operating companies income', posting a 12.5% gain in the period. Both Copenhagen and Skoal grew combined volume and market share during the quarter. Altria's 'Wine' division grew adjusted 'operating companies income' 13.6% thanks primarily to higher volumes.

Altria's management continues to be very shareholder-friendly, buying back 3.7 million shares of common stock and issuing a quarterly dividend of $0.44 per share during the period, the latter we expect to continue to grow along with earnings--the firm expects to maintain an 80% payout ratio on adjusted diluted earnings per share. Altria also upped its guidance range for 2013 and now expects adjusted earnings per share to come in between $2.51-$2.56 (the lower end of the range had previously been $2.50), implying a decent growth rate of 7%-9% over the adjusted measure in the year-ago period.

Valuentum's Take

The global cigarette-making industry continues to be in flux, as it deals with increased regulation on the packaging (graphic warning labels) in some international markets, heightened FDA concerns about the public health issues of menthol cigarettes, and the advent of the electronic cigarette (e-cigarette), a potential game-changer for the industry. The adoption of graphic warning labels on cigarette packaging in the US will always be a risk, while Altria has some exposure to menthol variants and FDA regulatory reach. Lorillard (NYSE:LO) currently boasts a dominant 40% share of the fast-growing e-cigarette market with its blu Ecigs (NJOY has roughly 35%-40% share), but Altria and other industry rivals are hot on their tails. Altria will release its first e-cigarette in August of this year (the MarkTen), and we're expecting it to make a big splash.

Though the risks of the tobacco industry are many, we're encouraged by Altria's demonstrated ability to grow 'operating companies income' in its 'Smokeable Products' unit, despite ongoing and intensifying volume pressures, a key pillar behind our investment thesis on the firm (the other pillar being its unappreciated share of fast-growing SABMiller, which it can easily monetize to bolster dividend payments, if need be). We're sticking with our position in Altria in both of our actively-managed portfolios at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: MO is included in our Best Ideas and Dividend Growth portfolios.

Source: Altria Reveals The Cigarette-Making Industry Remains In Flux