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Summary

  • Altria set to release Q1 2014 earnings on Thursday.
  • Big tobacco needs to diversify to stay relevant.
  • This release will offer insight into Altria's strategy going forward.

On Thursday, April 24, tobacco giant Altria (NYSE:MO) will report its Q1 2014 earnings. With the current changing landscape of the tobacco industry, investors will be watching the release closely in an attempt to gain insight into the company's outlook. Will higher taxes and the growing popularity of electronic cigarettes as an alternative to traditional smoking products impact the company's performance? Here is a look at the key points.

A Look At The Previous Release

Altria reported its FY and Q4 2013 earnings at the end of January, missing expectations in a number of areas. Q4 adjusted earnings of 57 cents per share missed a consensus forecast of 58 cents, while revenues net of excise taxes dropped 1.3% year over year to $4.4B, once again missing a consensus forecast of $4.5B.

Looking at segment specific numbers, revenues attributable to smokeable products - cigars and cigarettes - declined 1.8% on a quarter-over-quarter basis to $3.8B. The decline came primarily as a result of a 5.7% decline in shipping volumes. Similarly, revenues attributable to smokeless products - chewing tobacco and snuff - fell 1.7%, primarily as a result of higher promotional spending in popular priced products and lower shipment volume, the latter of which declined 4.3% quarter-over-quarter.

The Upcoming Release

Analysts expect Altria to report Q1 2014 earnings of between 55 cents per share and 58 cents per share, suggesting a bias weighted towards a decline on the results of the final quarter of last year. A number of factors could contribute to this decline.

The first is an overall decline in cigarette sales in the US. Traditional cigarette consumption has declining at an average rate of 4% per year since 2001, and 10% since 2009. The accelerating decline comes primarily as a result of recent health regulations and increased medical awareness as to the effects of tobacco consumption. Health related drivers aside, constantly increasing indirect taxation has driven tobacco consumers to abandon smoking altogether or find alternatives. It is unlikely that the acceleration in consumption decline will reverse, which will put pressure on Altria to bolster revenues across is smokeless and beverages operations.

The second is exponential growth in the electronic cigarette industry. From sales of just $20M in 2008, the electronic cigarette industry now generates close to $2B in annual sales, and analysts expect this figure to reach $10B by 2017. Altria has recently entered the space with a February announcement outlining the company's intention to roll out its MarkTen electronic cigarette brand nationally, but its delayed action has seen both incumbent competitors such as Lorillard (NYSE:LO) and small, first mover entrants such as American Heritage International gain market share. Future reports may well reflect Altria's MarkTen revenues, but they are unlikely to feature prominently in the upcoming release.

Non-Financial Focus

The shifting nature of the tobacco industry means investors will focus not just on the company's financial performance, but the accompanying comments as to how Altria will react to the changing industry landscape.

The FDA is now is now in charge of tobacco consumer regulation and taxation, the latter of which has seen 113 increases since 2000. Such aggressive taxation policies will force big tobacco to adjust its operations, be it directly through pricing alterations, or indirectly, through creative marketing, to maintain market share. Management is likely to comment on the company's response in this area in the upcoming release.

Additionally, the statement's accompanying comments will likely address Altria's approach to the electronic cigarette market. As mentioned earlier, the company's delayed entry into the space has afforded first movers such as American Heritage International the opportunity to gain market share. Industry experts expect the electronic cigarette industry to reflect its traditional cigarette counterpart, in that there will exist strong brand loyalty among consumers. For this reason, Altria management may decide to accelerate its roll out of its MarkTen brand, in addition to allocating increased marketing and development spend towards its electronic cigarette subsidiary, online retailer Green Smoke.

Competitor Performance

Lorillard is set to release its equivalent results on the same day. While the same industry factors will put pressure on the company's traditional cigarette derived revenues, Lorillard is further into its electronic cigarette operations than Altria. The company announced its $135M acquisition of electronic cigarette manufacturer Blu eCigs in April 2012, and has since reported impressive earnings from its sales. In February last year, electronic cigarettes contributed $39M to Lorillard's total net sales. By October, sales of Blu electronic cigarettes totaled $63M, representing close to 10% of the company's total sales. Investors can use the Lorillard electronic cigarette performance outlined in its upcoming report as a benchmark against which to project Altria's potential in the industry.

Final Word

The cigarette industry is in decline as increased healthcare awareness and ever-increasing taxation undermines both demand for traditional cigarettes and the ability of its constituent companies to grow revenues. However, this does not mean that companies like Altria cannot offer returns on an investment. Diversification will be the key to future growth, and the potential growth platform will likely feature heavily in the upcoming release's accompanying statements. Key components will be the company's approach to consumer perception of the traditional cigarette industry and the advancing of its operations in the electronic cigarette space.

Source: Altria Group's April 24, 2014 Earnings Report