Altria Group (NYSE: MO) is one of the world’s “Big Three” tobacco companies and is in the consumer staples sector. Let's examine the firm’s business segments and the state of the cigarette market. We'll then review its Q2 2024 earnings report and examine the company’s growth areas.
Altria's Segments: Smokeable Products Dominate
Altria divides its revenue into smokeable products, oral tobacco products, and “all other." Smokable products include cigarettes and cigars. Altria’s main brands are Marlboro, the best-selling cigarette in the US, and Black and Mild. It made up 92% of operating income in 2023.
Oral products include chewing tobacco and nicotine pouches. The company’s brands include Copenhagen and Skoal chewing tobacco and On! nicotine pouches. These products made up 8% of operating income. The “all other” segment includes the firm’s NJOY e-vapor product. It accounted for less than half a percent of total revenue and lost money, subtracting from operating revenue by 3% in Q2 2024.
To understand Altria's business model and performance, it's essential to focus on cigarette usage trends and how the company has navigated them, as cigarettes are still Altria's biggest product category.
The Decline of the Cigarette Industry and How Altria is Fighting Back
Demand for cigarettes has fallen considerably over the last 25 years. In 2000, 25% of U.S. adults surveyed said they had smoked cigarettes in the past week. In 2023, the number sat at 12%. Data also shows that those who smoke consume fewer cigarettes a day. As a result, the number of cigarettes sold per year in 2021 was half of what it was in 2000.
However, Altria Group has continued to grow its profits and has only seen modestly decreasing revenues over the past two fiscal years, down 2% and 0.9% in 2022 and 2023, respectively. Over the past three years, operating income has grown by a compound annual rate of 2%. Altria has been able to achieve this by substantially increasing its margins. Operating margin, gross margin, and adjusted net income margin have all expanded by 400 to 500 basis points since 2020.
Much of this has been achieved through cigarette price increases; Altria hiked prices four times in 2023 and has already done so once in 2024. Due to nicotine's addictive properties, Altria has the power to increase its prices and not substantially lower volumes. Additionally, brand loyalty for cigarettes is extremely high, estimated at 85% to 90% annually. This makes it even more unlikely that consumers will switch products due to price increases.
If smoking rates continue to decline as expected, then those who remain smoking will have to continually pay higher prices so that companies can increase their bottom line. This will be offset by new products that firms hope will attract new generations of nicotine users. Ultimately, growth will have to come from new products.
Altria's EPS and Revenue Miss
Altria Group’s adjusted earnings per share (EPS) came in at $1.31, which is three cents below estimates and flat from the previous year. Revenue also came in $120 million below estimates at $5.28 billion. Net revenues declined 4.6% from the previous year. The company also narrowed the range of its full-year adjusted EPS guidance slightly but maintained the same midpoint of $5.11.
Overall, smokable product volume decreased by 13%, but revenue only fell by 5.6%, showing the disproportionate ability to raise prices.
Analyzing Altria's Growth Areas
Altria is touting the expansion of its NJOY vapor product. Its share of the vapor device market increased by 14%, up to 25%. “All other” segment revenues grew 144%, but they are so small, at $22 million, that they make no difference to the bottom line.
A more encouraging avenue is in Altria’s On! nicotine pouches. It increased volume by 37% from Q2 2023, drastically higher than the volume growth in the oral tobacco industry. On! also increased its market share by 1.2% since Q2 2023.
Key competitor ZYN, made by Philip Morris (NYSE: PM), is losing market share due to its inability to keep up with demand. In April 2024, ZYN controlled an estimated 26.8% of U.S. smokeless tobacco sales. Considering the massive shortage in its biggest competitor, it feels disappointing that Altria was barely able to increase its market share.
Shares were down 3% on the day of the release. The glaring negatives regarding EPS, revenue, and guidance were the 2.2% misses on EPS and revenue. This, combined with On!'s disappointing performance, makes the reaction feel justified. Investors should continue to see if On! and NJOY products can gain further market share. However, these product lines have an extremely long way to go, and results so far are not great.
