Are Altria Group Earnings Still Headed Higher?

Image source: Altria.

Tobacco giant Altria Group (MO +0.83%) has delivered consistent growth to investors for decades, overcoming huge obstacles in order to survive and thrive in its business. Even while the rest of the stock market goes through the throes of turmoil from macroeconomic challenges around the world, Altria's focus on the U.S. tobacco market has kept it insulated from many downward pressures hitting other companies. Coming into its second-quarter financial report on Wednesday, Altria investors are expecting that the tobacco giant will be able to keep giving investors the growth they've come to expect. Let's take an early look at what people are looking for from Altria Group and whether it can live up to its reputation for stability.

Stats on Altria Group

Data source: Yahoo! Finance.

What's ahead for Altria earnings this quarter?

In recent months, investors have had mixed views about Altria earnings, cutting their forecasts for the second quarter by $0.01 per share but making a slightly larger increase to their views for the full 2016 year. Yet the stock hasn't shown any hesitation at all, climbing 12% since mid-April.

Altria's first-quarter results once again showed the consistency with which the company has been able to deliver solid performance for investors. Revenue climbed 6%, and net income rose by nearly a fifth, accelerating from recent quarters. Strong pricing power once again gave Altria an edge in driving its bottom line higher, but the company also experienced a rise in cigarette shipment volumes of 1.2%. The key Marlboro brand showed growth, but Altria also got beneficial effects from its discount offerings. Cost savings from strategic realignments also contributed to the bottom-line growth, and Altria said that it anticipated further cost-cutting measures could enhance its financial results further.

Altria also enjoyed some favorable news on the legal front during the quarter. In late June, the tobacco maker received a ruling from the Supreme Court choosing not to review a key decision concerning Altria's use of the words "lights" and "lowered tar and nicotine" in connection with its Marlboro Lights brand. A potential $10.1 billion verdict was reversed by the state of Illinois' highest court, and by choosing not to accept the case, the Supreme Court left that decision intact. Altria hasn't won all of its cases, but it has found ways to win in some of the highest-stakes decisions it has faced.

What challenges does Altria face?

Yet Altria will face heightened competition in the U.S. due to the entry of a major international company. Japan Tobacco has introduced its LD low-price discount brand in the U.S., and the company has done a good job of quickly gaining shelf space in convenience stores and other key distribution locations. Because the international regulatory environment is quickly becoming as challenging as the U.S., international cigarette producers like Japan Tobacco see less risk in entering the U.S. market, and that could pose a new threat that few investors have taken seriously in the past.

There has also been some recent uncertainty about the status of the proposed buyout of SABMiller by Anheuser-Busch InBev, which could have an impact on Altria because of its stake in SABMiller. The U.K. Brexit vote to leave the European Union has hurt the value of the pound, and that has opened up a large disparity between the cash that most shareholders will receive and the combination of cash and stock that Altria expects to receive. As a result, activist investors are looking for a higher cash price, and that could force Anheuser-Busch to change the deal in order to get a positive shareholder vote from SABMiller.

In the Altria earnings report, investors will want to keep their eyes on the competitive picture in the U.S. tobacco industry and the potential impact on Altria's dominance. As long as it can continue to wield its pricing power and find ways to keep smokers choosing its cigarette brands, Altria should be able to keep delivering the consistent earnings growth that investors want to see.