How Altria Group's 2014 Could Look Brighter

Altria Group (MO 1.14%) posted solid performance in 2013, rising in line with the stock market even though it faced plenty of challenges from the issues affecting the tobacco industry. Yet even as Altria continues to deal with the difficulty of overcoming declining smoking rates in the U.S., it also needs to make sure it keeps up with Lorillard (LO.DL) and Reynolds American (RAI) in interesting new growth areas like electronic cigarettes.

The surprising thing about Altria Group's performance in 2013 is that the company did such a good job boosting profits even as revenue was largely stagnant. At some point, though, Altria needs to find new avenues for revenue growth if it wants to keep earnings moving higher. Whether that growth comes from electronic cigarettes, non-cigarette tobacco substitutes, or other products as yet undeveloped remains to be seen. Let's take a closer look at Altria Group's prospects for 2014.

Stats on Altria Group

Source: Yahoo! Finance.

What's next for Altria Group in 2014?
As you can see above, Altria Group doesn't have all that much upside potential left in most analysts' eyes, with target prices just 6% above current share prices. A 5% dividend yield is enough to bring the upside into double-digit percentages, and Altria isn't in any worse shape than Lorillard or Reynolds American when it comes to the relative lack of share-price appreciation potential.

Electronic cigarettes are getting the lion's share of attention when it comes to possible growth avenues for Altria. Already, Lorillard has managed to claim a huge portion of the growing market with its Blu eCigs product, while neither Reynolds American's Vuse nor Altria's MarkTen has made any appreciable dent in the overall market. Still, with analysts expecting the e-cigarette market to become a $10 billion business in the next three years, Altria could eventually get a respectable percentage of its overall revenue from the segment, especially if its cross-promotional efforts with Philip Morris International (PM 0.31%) bear fruit.

Beyond e-cigarettes, Altria also has opportunities for growth in smokeless tobacco. The company's Skoal and Copenhagen units managed to post double-digit sales growth in the third quarter, with smoking bans not having any impact on their availability. Still, smokeless tobacco makes up a minuscule portion of Altria's sales, making even enormous growth insufficient to move the needle substantially for the company.

Of greater concern to Altria, though, is consumers' switching away from premium brands like Marlboro to value brands. Reynolds has seen explosive growth in the amount of pipe and roll-your-own-cigarette tobacco sales, while its premium-brand sales haven't performed nearly as well. Given the higher margins on Marlboro, Altria needs to see this trend reverse itself if it wants to make the most of the huge amounts of money it has spent building its name-brand presence worldwide.

For Altria to have a successful 2014, it needs to keep looking for ways to cut costs while hopefully growing business in key areas like electronic cigarettes. If regulatory efforts nip the e-cig trend in the bud, though, it could spell problems for Altria and its peers this year and beyond.

Click here to add Altria Group to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.