Will Altria Group's Earnings Take a Big Tumble?

Altria Group (MO +0.82%) hasn't been able to participate fully in the stock market's strong performance so far in 2017. Even though the tobacco company saw early success thanks to its tenacity and brand power, rising concerns among shareholders have centered on regulatory challenges and the potential fallout for Altria's core cigarette business.

Altria expects to report third-quarter results on Thursday, Oct. 26, and although those following the stock are guardedly optimistic, they still see the likelihood that the company won't be able to do much to boost its top line as much as it has in the past. Investors will want to see an enlightened approach to future growth that will respond to the actions that Altria itself will have to take in order to comply with a court order in a long, hard-fought legal battle. Let's take a closer look at Altria to see what you should be ready for in its coming earnings report.

Stats on Altria Group

Data source: Yahoo! Finance. * Net of excise tax.

Can Altria earnings rebound?

Altria investors have had mixed views about the company's earnings, cutting their estimates for the third quarter but boosting their fourth-quarter projections by the same amount. The stock has struggled considerably, falling more than 11% since mid-July.

A big part of Altria's troubles started with the release of its second-quarter results. The tobacco giant saw an encouraging rise of almost 4% in its revenue, which was faster than most investors had expected to see. Yet adjusted earnings growth wasn't as strong as anticipated, and the company resorted to a big addition in its stock buyback program to express its view that allocating capital into purchasing shares represented good value at current stock prices.

Several headwinds from last quarter's report will continue this quarter and beyond. For instance, California's implementation of a substantial boost to its cigarette excise tax contributed to a nearly 3% decline in domestic cigarette shipment volume. Marlboro is a key player in the California market, and the higher excise tax was one factor in the drop in total market share that Altria enjoyed last quarter. The effects of the tax will hold Altria back until next April, when year-over-year comparisons will include the tax in both periods. A recall earlier this year of smokeless tobacco products was resolved quickly, but Altria kept seeing downward pressure on market share in that segment as well, suggesting that some long-term reputational damage might have occurred.

Image source: Altria.

What's ahead for Altria

Arguably the biggest new issue that investors will have to watch closely is how the resolution of a court dispute dating back nearly 20 years will affect results going forward. Altria said in early October that it has agreed with its domestic cigarette-producing peers about how to handle a court order that requires them to publish five statements related to cigarette smoking in newspaper and television ads. The statements will address the adverse health effects from smoking, the fact that smoking and nicotine are addictive, and the use of cigarette design and composition to deliver nicotine in an optimal manner. They'll also point out that so-called low-tar or light cigarettes have shown a lack of significant health benefits over regular cigarettes while noting the harmful impacts of exposure to secondhand smoke. The print ads will start running in late November and go through early March, while broadcast television ads will continue weekly for a full year.

In the Altria earnings report, investors should watch to see how management deals with these key issues. Altria is already making moves toward embracing alternatives to traditional cigarettes, but it hasn't been quite as aggressive as some of its peers in doing so. With negative publicity on the way, Altria will have to make the most of a tough situation if it wants to stay ahead of the curve and find ways to ensure the long-term survival of its business.