Can Altria Group Keep Up Its Growth in 2017?

Altria Group (MO +0.52%) enjoyed a solid 2016, and shareholders got their just desserts with a 20% total return for the year. Yet Altria's consistent challenge has been to produce revenue and net income growth even as the outright number of smokers has fallen over time. As investors prepare for Altria's fourth-quarter financial report on Feb. 1, they're hoping that the company will be able to fend off adverse trends and at least avoid seeing earnings and sales fall. Let's take an early look at Altria to see what investors should expect from the cigarette giant this quarter and for the remainder of 2017.

Image source: Altria Group.

Stats on Altria Group

Source: Yahoo! Finance.

What's ahead for Altria earnings?

In recent months, investors have been just a bit cautious about Altria's earnings prospects, cutting $0.01 per share from their fourth-quarter projections and $0.02 per share from their predictions for 2017. The stock, meanwhile, has performed well, climbing 13% just since mid-October.

Altria's third-quarter results showed the continuing battle that Altria has had to fight over time. For the quarter, Altria produced sales gains of 3%, and that was better than most investors had expected to see. Even though one-time charges hurt net income on a GAAP basis, adjusted earnings also topped the consensus figure. Yet cigarette shipment volumes were down 1%, and the results would have been even worse had it not been for beneficial trade inventory movements. Still, Altria retained market share of more than 51%, and strength in the smokeless tobacco and wine business also helped to lift Altria's prospects as the company reaffirmed its guidance for the full 2016 year.

Going forward, Altria will face a couple of challenges that have come up over the past few months. First, the results of the 2016 election will have substantial implications for Altria, most notably because of the cigarette tax that voters in California passed by a 63% to 37% margin. The measure boosted the existing tax on cigarettes by $2 per pack, with the stated purpose of using the proceeds to fund healthcare initiatives, tobacco use prevention and control programs, and disease research on tobacco-related illnesses. Despite having fought the measure, tobacco companies will now bear the added costs, and California's status as the second-biggest state tobacco market in the U.S. will force Altria to come up with a strategy to maneuver pricing in a way to maintain sales and profits as best it can.

In addition, the recent news that British American Tobacco (BTI 1.74%) will buy the remainder of Reynolds American (RAI +0.00%) will pose a new competitive dynamic for Altria. British American believes that its global business will benefit from having the stability of Reynolds' U.S. exposure under its corporate umbrella, but it also sees further possible benefits from having assets like the key Newport cigarette brand united under common ownership for worldwide distribution. By increasing scale, the move should make Reynolds more competitive in the U.S., and Altria will have to make sure that it can defend its leadership role to avoid having Reynolds and British American surpass it.

However, Altria has had some good news that could bolster shareholders' spirits. The recent announcement that Altria would buy ultra-premium cigarette and cigar company Nat Sherman is a victory for the company as it tries to gain better share in the fast-growing luxury tobacco market. Nat Sherman's standing among aficionados is a strong one, although Altria will have to work hard to ensure that its big-business reputation doesn't lead cynical customers to abandon the brand.

In the Altria earnings report, investors will want to look at the latest numbers, but more important will be how the company's management expresses their strategic vision for 2017 and beyond. At a time when the tobacco giant has to navigate changing currents both in market conditions and the regulatory environment in which it finds itself, Altria will want to reassure its shareholders that it can sustain the impressive long-term growth record that has made it so successful over the long run.