Altria Group, Inc. (NYSE: MO) released its Q4 2018 results on January 31, 2019 and conducted a conference call with analysts the same day. The company fell marginally short of analysts’ expectations for revenue, primarily due to the continuing trend of decline in cigarette shipments and under-performance in the company’s wine segment, partially offset by higher price realization and revenue generation from its smokeless products. Altria reported net revenue of $4.78 billion for the fourth quarter of 2018, which marks a growth of 1.5% on a year-on-year basis. The company met the consensus EPS estimates with an adjusted earnings per share of $0.95 in Q4 2018, 4.4% higher than $0.91 in Q4 2017.
The major takeaways from the announcement have been illustrated in the graphs using our interactive dashboard – Altria’s Q4 2018 Financial Performance.
Key Factors Affecting Altria’s Results
- Decreasing cigarette shipments: During Q4 2018, domestic cigarette shipment volume declined by 4.4%, in line with the industry’s rate of decline and retail share losses. Total domestic cigarette industry volumes declined by about 5% during this period due to rising health concerns and increased awareness, leading people to switch to non-combustible products. At the same time, cigar shipments increased by 2.9% due to lower prices.
- Smokeable products segment and declining market share of Marlboro: Over the last few years, Altria’s smokeable products segment, which is the company’s largest segment and contributes 85% of total revenues, has been witnessing price increases, as it was the only step the company resorted to in face of declining volumes. In Q4 2018, in spite of a 4.5% increase in prices, net revenue increased by a meager 0.4% due to a decline in shipments. However, for the full year, segment revenue declined by 1.5% to $22.3 billion on the back of a 5.8% drop in cigarette volume. Marlboro, which is the biggest cigarette brand, has seen its market share decline steadily to 43.1% in 2018, from 43.4% in 2017. Adjusted operating margin declined by 0.8% in 2018 due to lower shipments, higher costs (including investments in strategic initiatives), and higher resolution expenses.
- Growth in smokeless segment: Domestic shipment volume declined by 1.9% in Q4 2018 and by 1% in FY 2018, primarily driven by the industry’s rate of decline. Total smokeless industry volume declined by almost 1.5% during the year. Though revenues saw a marginal decline of 0.5% in Q4 2018, compared to 2017, for the full year revenue registered a healthy increase of over 5%, driven by higher pricing and lower promotional investments. Adjusted operating margins for the year increased by 7.5% due to higher pricing and lower promotional investments. Copenhagen, a premier product in the oral tobacco category, increased its share from 34.1% in Q4 2017 to 34.7% in Q4 2018. Additionally, Altria is also expanding in the smokeless segment through acquisitions (Cronos and JUUL).
- Underperformance in the Wine segment: Net revenue in the wine segment declined by 11% in Q4 as shipments decreased by 15.1% over Q4 2017. Lower shipments were partially offset by a favorable premium mix. Adjusted operating income margin decreased from 29.2% in Q4 2017 to 15.8% in Q4 2018 on the back of higher input costs and one-time employee bonus payments. The segment is facing pressure from growth in craft beers, growing imports of foreign bulk wine, continued trade inventory reductions, and slower premium wine category growth.
For the full year, total revenue declined by 0.8% to $25.4 billion, driven by lower revenue from smokeable products and wine sales, partially offset by higher revenues from the smokeless category. As Altria resorted to price increase in all the segments, the excise payment as a percentage of revenue saw a decline, which translated into 0.7% rise in revenues net of excise to $19.6 billion. EPS declined due to a significant fall in net income margin from 40% in 2017 to 27.5% in 2018, driven by higher income taxes (tax was very low in 2017 due to benefits from Tax Reform Act) and increased asset impairment, exit, implementation, and acquisition-related cost (related to acquisition of JUUL, cost reduction program, and impairment of Columbia Crest Trademark).
What awaits Altria in 2019?
Going forward, we expect the smokeless products division to be the fastest growing segment for the company, with an expected revenue growth of 10.5% in 2019. Altria recently announced two major investment decisions which would provide long-term diversification benefits to the company. Altria announced the acquisition of a 45% equity stake in Cronos Group, a leading global cannabinoid company. In December 2018, Altria also announced its decision to acquire 35% in JUUL Labs Inc. – a company that represents ~30% of the total US e-vapor category. This will help Altria complement its non-combustible offerings in the smokeless category.
We expect to see a modest increase in revenue from wine and smokeable products, driven by price increases. Total revenue is expected to increase by about 2% to $25.8 billion in 2019. Altria recently announced a cost reduction program which includes third-party spending cuts and workforce reductions. This program, which is expected to deliver $575 million in annualized cost savings by the end of 2019, could likely push net income margin to about 31% in 2019, up from 27.5% in 2018.
We have a price estimate of $57 for Altria’s stock, which is currently higher than its market price. The company still has $345 million remaining in its $2 billion share repurchase program, which it expects to complete by the end of Q2 2019. Altria has increased its annualized dividend yield, which stood at 7.2% in January 2019. We believe that the recent acquisitions, implementation of the cost reduction program, higher dividend pay-out, and additional share repurchases during the year will support the growth in Altria’s stock price in 2019.
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