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Altria Beats on Q3 Earnings, Revenues; Maintains FY View

Marlboro owner Altria Inc.’s (MO) posted impressive third-quarter results as both revenues and earnings surpassed the Zacks Consensus Estimate. However, strong performance by the Smokeable sector was offset by decline in the Smokeless category.

Adjusted earnings of 69 cents per share in the third quarter of 2014 beat the Zacks Consensus Estimate of 68 cents per share by 1.5%. Earnings also exceeded the prior-year quarter’s results by 6.2%, backed by strong performance of the core tobacco business and leading premium brands.

Altria Group, Inc - Earnings Surprise | FindTheBest

Revenues and Margins

Revenues, net of excise taxes, remained flat year over year at $4.8 billion for the quarter as revenue gains in the smokeable segment were offset by sales decline in the smokeless segment. Revenues also beat the Zacks Consensus Estimate of $4.7 billion by 2.1%.

In the quarter, gross profit declined 5.2% from the year-ago quarter to $2.7 billion due to higher cost of sales. Operating income slipped 7.2% year over year to $2.1 billion due to higher marketing, administration and research cost.

Segment Details

Smokeable Products Segment: Revenues increased 2.7% to $4.16 billion as higher pricing was offset by lower shipment volume.

Shipment volume in the quarter declined 2.8% to 33.5 billion units from the prior-year quarter, primarily due to overall decline in the industry.

The company’s retail share increased 0.2 basis points backed by higher shares in leading brands like Marlboro and L&M in the Discount category. However, retail share of other portfolio brands declined during the quarter.

Adjusted operating income increased 9% year over year to $1.8 billion, reflecting higher pricing. Operating income margins inflated 2.5 percentage points (pp) to 44.3% during the quarter.

Smokeless Products: Revenues slipped 4% to $430 million due to lower volume.

Smokeless products’ shipment volume increased 4.6% to 203.0 million units mainly due to one less shipping week in the quarter.

Copenhagen brand’s retail share slipped 0.5 pp during the quarter, while Skoal witnessed a 9.7 pp decline in retail share primarily due to competitive activity.

Furthermore, adjusted operating companies’ income increased 0.7% year over year to $279 million backed by improved volume and pricing. Operating companies’ income margins gained 3.1 pp to 64.9%.

Wine: The segment’s revenues went up 3.5% year over year to $148 million mainly due to higher pricing and improved shipments. Wine shipment volume increased 4.2% to $1.95 million units due to higher distribution of the 14 Hands brand.

Adjusted operating companies’ income went up 10.7% to $31 million on the back of positive pricing. Operating income margins shrank 1.3 pp to 20.9%.

Other Financial Details

During the third quarter of fiscal 2014, Altria repurchased approximately 6.4 million shares for nearly $275 million.

Altria’s subsidiary Nu Mark LLC (Nu Mark) continued its national expansion of MarkTen e-vapor products during the third quarter. MarkTen was distributed in approximately 80,000 retail stores in the western half of the U.S. Nu Mark plans to further expand MarkTen in the eastern half of the country and complete the national expansion in the fourth quarter.

In Aug 2014, Altria announced a quarterly dividend hike of 8.3% to 52 cents per share. The new dividend was paid on Oct 10, 2014 to shareholders as of Sep 15.

Altria regularly returns value to its shareholders. Since the spin off of Philip Morris International Inc. (PM) in 2008, Altria increased its dividend every year. Moreover, the company has increased its dividend 48 times in the last 45 years.

Outlook

Altria reaffirmed the 2014 earnings guidance. The company expects earnings in the range of $2.54 to $2.59. The guidance reflects an increase of 6% to 9% from $2.38 in 2013.

Altria expects 2014 earnings to benefit from lower interest expense, lower effective tax rate and lower share count due to the current share buyback program.

Reynolds-Lorillard Merger, a Possible Threat?

Altria’s two peers Reynolds American Inc. (RAI) and Lorillard Inc. (LO) entered into an agreement where the former will take over the latter for $68.88 per share or $27.4 billion, including assumption of net debt. The combined entity might pose a threat to Altria, which commands more than 40% market share in the U.S. tobacco industry.

Altria carries a Zacks Rank #3 (Hold).

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