Altria Looks Smoking With Fat Dividend, Stock Could Clear $30 On Earnings

Source from:  Forbes 10/17/2011

Altria Group releases its Q3 earnings on October 27. As the largest tobacco company in the U.S. with leading brands, its strong pricing power and product mix continue to be the key sources of value creation. Last quarter, Altria posted impressive earnings with solid operating margins and retail market share growth with strong performance of its premium brands, especially Marlboro. See our note, Marlboro is Still the Man at Altria, Carries Results. While the trend for the tobacco business haven't changed much fundamentally, government intervention in the way of taxes and smoking bans will continue to impact demand. We expect to see positive pricing trends continue for the cigarette business and its smokeless offerings continue to chip in meaningful growth. We have a $29.57 price estimate for Altria, which is 10% ahead of the market price. See our complete analysis of Altria stock here. Demand for Cigs Getting Smoked by Taxes The cigarettes division contributes almost three-fourths of Altria's stock value, occupying 50% of the retail market share in the U.S. The volume of cigarette sales has been continuously declining in the U.S. owing to growing health consciousness among people about the health risks of smoking as well as legislative measures like a ban on public smoking and high excise taxation. With the federal excise tax increasing from $0.39 to $1.01 per pack of 20 cigarettes in April 2009, Altria's cigarette volume sales sharply declined by 15% by the end of 2010. With no excise tax announcements happening or pending in the near term, the decline in cigarette sales has slowed and the trend is expected to continue unless the market is disrupted by new excise duties. Amid declining volume of sales, Altria maintains its profit margins through higher pricing to defend its operating margins. Last quarter it posted operating income growth of 6% (yoy) through charging higher revenue per cigarette. Company's flagship brand, Marlboro performed strong with recent product launches and strengthening menthol business. We expect these trends to continue. More People Packing Dips The smokeless tobacco division is the only segment that has been growing for the company in the past several quarters. The product has gained popularity as an alternative to cigarettes due to lower perceived health risks. The segment's revenues grew by 14% in 2010 and are expected to grow by 9% this year. Last quarter, the operating margin expanded by 12% (yoy) through higher pricing. Its premium offerings Copenhagen and Skoal have been gradually expanding market share and have benefited from recent product introductions. We expect these trends to continue. In the cigars segment, Middleton faces difficult competition from imported, low-priced machine-made cigars. It has been investing new products, promotion and brand building to defend its market share, and as a result, we expect depressed cigars operating margins. In the wine segment, Ste. Michelle has been improving its mix with more higher margin premium products and is likely to see an upside to the operating margins. However, the two divisions contribute to a total 3% to Altria's stock value and have lesser bearing on the overall performance of the company which largely comes from its cigarettes and smokeless products divisions. Enditem