Altria (NYSE:MO) plans to release its quarterly earnings report on April 28th. Currently, the market anticipates an EPS of $0.68, which is 5 cents higher than in Q1 2015. In anticipation for the earnings release, the company's stock has declined over the past couple of weeks. The latest earnings report of Philip Morris International (NYSE:PM), which came out earlier last week, disappointed as the EPS came short of market expectations. This report may have also contributed to the bearish sentiment that has held up MO. Let's take a closer look at some of the recent market developments that could impact Altria's earnings.
Consumer spending is rising slowly
Demand for tobacco is characterized as inelastic - i.e., cigarette consumers don't change their behavior much and some don't change at all. But when prices of cigarettes rise, the aggregate demand still tends to moderately react to fluctuations in wages and prices, especially among young people. And so far this year, even though wages in the U.S. have gone up - according to the last NFP report wages went up by 2.3% - consumer spending has only moderately increased (0.1% monthly growth in January and February). Bear in mind, however, that last year also didn't start strong, with a decline in consumer spending that later that year shifted to higher growth rate. The higher consumer spending pace seems to have also reflected in Altria's shipment volumes last year: total shipment volume of cigarettes and smoking tobacco products rose by 0.5% year on year. If spending were to pick up again this year, we could also see another gain in shipment volume. Alas, for now, investors could be a bit more worried that shipment volume won't rise in 2016 as it did back in 2015. After all, Philip Morris International still expects shipments to fall by 2% to 2.5% this year compared to 2015. But PM's circumstances are different from MO's. The former faces harsher competition and needs to account for the currency fluctuations and its impact on the pricing of its products. Whereas MO still controls over 50% of the tobacco market in the U.S.
Considering most of Altria's revenue gain comes from price increases, any gains in shipments could only further augment its profits and lead to a positive surprise to its earnings. This could also result in a higher than expected raise in its dividend, as was the case last year. For now, the company is likely to raise its dividend by 8% to 9%, as I have referred in a previous post, which assumes Altria were to maintain its policy of paying back 80% of its profits to its shareholders. And keep in mind, the company could also return profits to its shareholders via its buyback program, which still has a $965 million allotment.
One question that will remain is whether consumer spending will pick up again this year at a faster pace, which could also suggest a possible gain in shipment for Altria. Last year also didn't start off strong, but as the year progressed, consumer spending picked up and so did Altria's earnings. For Q1, Altria may not beat market estimates, which could bring down, over the short run, the company's stock. For more please see: Is it Time to Buy Altria?
Disclosure: I am/we are long MO.
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.