Altria Group, Inc. Earnings: Will Slow but Steady Win the Race?

On Thursday, Altria Group (MO 0.70%) will release its quarterly report, and investors appear to have come to grips with the realities of the tobacco industry and its future prospects. Even despite strong competition from Reynolds American (RAI) and Lorillard (LO.DL), the real question that Altria and its peers have to face is whether long-term trends toward less smoking will continue and how Altria can respond to keep its overall profits high.

For decades, Altria Group has defied the expectations of many that the company would have to cease or at least scale back its business considerably. Having successfully fought in courtrooms, Altria has more recently faced regulatory and consumer-health advocacy attacks aiming to make it more difficult for tobacco companies to profit from their products. Yet even though growth in earnings and revenue is expected to remain slow for Altria for the foreseeable future, is that enough to make Altria stock a good investment? Let's take an early look at what's been happening with Altria Group over the past quarter and what we're likely to see in its report.

Source: Lindsay Fox.

Stats on Altria Group

Source: Yahoo! Finance.

Will Altria earnings accelerate this quarter?
In recent months, analysts have gotten just the slightest bit more pessimistic about Altria Group earnings, keeping first-quarter estimates unchanged but reducing full-year 2014 and 2015 projections by about 1%. The stock has recovered from an early dip and gained 6% since mid-January.

Altria Group's fourth-quarter results showed the pressure that the tobacco giant is under. Earnings missed expectations, with extensive volume declines largely to blame even though the company held on to its market share. Shipment volume of Altria's key Marlboro brand dropped 5.7% in the quarter, and even though price increases were able to improve the company's overall profit, investors nevertheless took the negative trend as disappointing in light of a past bump higher in Marlboro volumes late in 2013.

If anything, volume pressures are likely to have grown this quarter. Earlier this year, one major drugstore chain announced that it would no longer sell tobacco products, sacrificing more than $2 billion in lost revenue in a bid to establish itself as the healthiest drugstore business in the industry. State attorneys general are now rallying for other drugstore retail peers to join the fight, and if the movement gains momentum, it could spell even further difficulty for Altria, Reynolds American, and Lorillard.

Source: Green Smoke.

In response to declines in cigarettes, the electronic cigarette niche has gained a lot of attention as a place where Altria Group and its peers could generate growth. Although Lorillard largely pioneered the big-tobacco presence in e-cigs, Altria Group bought upstart Green Smoke earlier this year in a $110 million acquisition that it hopes will bolster its footprint in the increasingly important market niche. Even though regulators are looking to impose bans and other protective measures against e-cigarettes as well, Altria can't afford to miss out on what could be the future direction of the tobacco industry as a whole.

The wild card for Altria is whether reports that Lorillard and Reynolds American might merge prove to be true. For Lorillard, the move would avoid potential devastation if the FDA and other regulators ban menthol cigarettes, which make up a huge portion of its overall business. Yet by creating a behemoth that could more handily compete at Altria's level, a Reynolds-Lorillard combination could threaten Altria's long dominance of the industry.

In the Altria Group earnings report, watch to see how volumes and pricing combine to produce sales and net income growth or contraction. It's not obvious how Altria can grow, but given that it has produced strong returns for investors despite similar worries for decades, it's not smart to count Altria out just yet.

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