For more than half a century, cigarette smoking has been on the decline, forcing companies like Altria Group (NYSE:MO) to adapt to changing conditions. Despite attacks on multiple fronts, Altria has found ways to win court battles, fight back against consumer advocates, and use its brand loyalty to push profits higher. Recently, Altria has started to get more of a presence in the cigarette-alternative market, following the lead of industry peers that have seen considerable success in that niche.

Coming into Thursday's third-quarter financial report, Altria investors were looking to see very modest gains in revenue but solid profit increases. Altria's revenue was actually lower than year-ago levels, but solid bottom-line performance confirmed for most investors that the company remains on course. Let's look more closely at how Altria did and what lies ahead for the tobacco giant.

Altria logo sign in front of a company facility.

Image source: Altria Group.

Altria sees sales sag, succeeds anyway

Altria's third-quarter results continued a trend of mixed performance. Revenue net of excise taxes was down about 1% to $5.12 billion, which was slightly worse than the slight gain most investors were expecting to see. Yet net income soared 70% to $1.87 billion, and after allowing for some one-time items, adjusted earnings of $0.90 per share topped the consensus forecast for $0.88.

The key smokeable products segment reflected the issues that the entire company faced. Revenue dropped almost 3% from year-ago levels, as pricing power was insufficient to make up for volume declines. The business suffered a particularly steep drop in shipments of more than 6%, as retail market share declined for Altria's brands compared to those of its domestic competitors. Yet reported operating company income jumped 8% on an adjusted basis as Altria cited lower costs and smaller numbers related to tobacco and health-related litigation. The key Marlboro brand saw market share drop half a percentage point to 43.2%, and that sent Altria's overall share down to 50.5% from 51.1% in the third quarter of 2016.

The smokeless products segment did better than its smokeable counterpart. Revenue net of excise tax was up 4.5% for the quarter, and adjusted operating company income jumped almost 16%. Shipment volumes were down almost 2%, but higher pricing and fewer investments in promotions helped to bolster the unit's bottom line. The Skoal brand continued to underperform its peer Copenhagen, and all told, market share for Altria's smokeless product line fell by more than a percentage point to 53.8%.

Altria kept seeing tough times in its wine business. Sales were down just a fraction of a percent, but adjusted operating company income dropped 5% due to higher production costs. Shipment volume was roughly unchanged for the quarter, showing some signs of improvement from extensive declines in earlier in the year.

CEO Marty Barrington kept his comments simple: "Altria delivered outstanding performance in the third quarter and for the first nine months of 2017," Barrington said, "as our core tobacco operating companies generated strong income growth." The CEO pointed to expected strengthening in the second half of 2017 as showing up in Altria's third-quarter results.

What's ahead for Altria?

Altria once again repeated its call on full-year earnings growth, which it still sees in a range of 7.5% to 9.5%. That would work out to a range of $3.26 to $3.32 per share on an adjusted basis for 2017.

Many investors hope that reduced-risk products will play a more important role for Altria going forward, and one piece of news during the quarter provided a good sign of potential growth in that area. Altria's MarkTen e-vapor product saw third-quarter volume jump by more than half, as the company expanded its distribution network to take advantage of overall growth in demand for e-vapor. Market share for MarkTen hit 13.5%, and even though the company already has its products in stores representing almost two-thirds of total category volume, Altria's Nu Mark subsidiary will expand into 15,000 additional retail stores during the fourth quarter.

Altria investors were pleased with the report, and the stock climbed more than 3% on Thursday following the report. Even though pressure in the conventional cigarette business continues, new optimism about alternatives could be the catalyst to get Altria stock moving in the right direction again.

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