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This Business Is Altria Group's Best-Kept Secret

By Dan Caplinger – Sep 19, 2016 at 11:12AM

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Few people know that this division is under the cigarette giant's corporate umbrella.


Image source: Ste. Michelle Wine Estates.

Most investors know Altria Group (MO 0.58%) for its dominance in the cigarette market. With its world-renowned Marlboro brand, Altria has built up a tobacco empire, and the company gets more than 95% of its revenue from tobacco products in the smokeable and smokeless categories. Yet hiding in plain sight in the shadow of the company's formidable tobacco operations, Altria has a little-known business that is quite profitable and has consistently grown over the years. Let's take a closer look at Altria's wine division to see how it has performed and what its future prospects look like.

In vino veritas

Altria's exposure to the wine business comes from its Ste. Michelle Wine Estates business. Ste. Michelle joined the Altria family of companies when the tobacco giant bought out smokeless tobacco company UST, paying a total of $11.7 billion including the assumption of UST debt. UST owned Ste. Michelle, and so Altria got the wine business as part of the deal.

Altria's 2008 press release discussing the transaction made it fairly clear that the Ste. Michelle portion of the acquisition wasn't the focal point of the deal. Altria's then-CEO Michael Szymanczyk heralded the merger as "creat[ing] the premier tobacco company in the United States, with leading brands in cigarettes, smokeless tobacco, and machine-made large cigars." Szymanczyk limited his comments on the wine assets to a single statement: "We will also acquire Ste. Michelle Wine Estates, a premium wine business, as part of the transaction."

What Ste. Michelle does

Ste. Michelle Wine Estates is a collection of distinctive vineyards and related properties. Its portfolio highlights brands in the Pacific Northwest, with well-known properties throughout Washington State. Ste. Michelle also owns wineries in the Napa Valley and has partnerships with vineyards worldwide.

Yet one thing that sets Ste. Michelle apart from some corporate-owned wineries is its philosophy toward managing its assets. Ste. Michelle prides itself on maintaining the distinctive nature of its individual vineyards, allowing each estate to take full advantage of its unique characteristics to distinguish itself not only from competitors but also from other Ste. Michelle-owned wineries. That devotion not only has allowed each wine estate to remain connected to the local community it serves but also ensures a diverse set of offerings to customers.

Ste. Michelle's financial success

Ste. Michelle has never played a huge role in Altria's overall finances, but its growth trajectory has been impressive. Below, you'll find Ste. Michelle's financial history since Altria started breaking out its financials following the UST acquisition in 2009.

Year

Sales

Pre-Tax Operating Profit

2009

$403 million

$43 million

2010

$459 million

$61 million

2011

$516 million

$91 million

2012

$540 million

$104 million

2013

$587 million

$118 million

2014

$620 million

$134 million

2015

$668 million

$152 million

Data source: S&P Global Intelligence.

As you can see, Ste. Michelle has quietly become quite successful from a financial standpoint. Revenue has climbed by nearly two-thirds in just six years, easily outpacing Altria's larger tobacco-related segments. The operating margin that the wine business has produced has climbed impressively over that time frame, allowing pre-tax profit to triple since 2009.

The secret of Ste. Michelle

Even with this success, Altria rarely talks much about Ste. Michelle. At its presentation to the Barclays Consumer Staples Conference, the topic of the wine business didn't come up at all. During Altria's most recent quarterly earnings conference call, comments were limited to CFO Billy Gifford's three sentences discussing hard financials and growth numbers.

Part of that silence is likely deliberate. Some wine enthusiasts have expressed their discomfort with the idea that a tobacco company stands behind the maker of some of their favorite wines. Ste. Michelle's website doesn't highlight the connection to Altria, and although Altria's website includes Ste. Michelle, it largely links out to the wine maker's own site for those seeking further information.

Nevertheless, Altria investors should be pleased to have Ste. Michelle Wine Estates as part of the company's overall holdings. Ste. Michelle is only a small part of the Altria story, but it adds a different character to the company that has not only helped add to Altria's financial prosperity but also brings some valuable diversification to its overall business exposure.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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