For most businesses, the goal is to grow revenue and profit at the same time. Yet that isn't always possible, and with the cigarette industry having been in secular decline for decades, Altria Group (NYSE:MO) has had to use an alternate strategy in delivering earnings growth to its shareholders. For Altria, boosting revenue isn't as important as ensuring that it can squeeze every bit of potential profit it can from its sales. Until alternatives to cigarettes gain more traction, it's likely that Altria will have to keep using that strategy if it wants to boost its earnings in the future.

Altria investors have gotten used to seeing the company succeed in its efforts to grow earnings, and they fully believed that the second quarter of 2018 would be no different. Altria's success did in fact continue, but falling revenue could well put more pressure on the tobacco giant in future years that could eventually make it more difficult for the company to keep earnings moving in the right direction.

Sign with Altria logo in multi-color.

Image source: Altria Group.

A similar story for Altria

Altria's second-quarter results showed a mix that's extreme even for Altria. Revenue net of excise taxes was down almost 4% to $4.88 billion, which was well below the $5.02 billion consensus forecast among those following the stock. However, adjusted net income jumped 16% to $1.91 billion, and that produced adjusted earnings of $1.01 per share. That just topped the $1 per share that most investors had expected to see.

As we've seen in past quarters, the smokeable products division was one of the weaker performers under Altria's corporate umbrella. Revenue net of excise tax was down 5%, and adjusted operating company income fell 3% because of declines in volume. Higher litigation costs also weighed on the segment's bottom line, with higher pricing managing to offset the downward pressure only in part. Domestic cigarette shipments plunged 11%, with the key Marlboro brand suffering a 10% shipment volume decline. That took the segment's market share down by 0.7 percentage points from year-ago levels to 50.2%.

Altria did better outside smokeable products. The smokeless products business saw revenue rise almost 3%, and adjusted operating company income was higher by nearly 4% from year-earlier figures. Yet there too, shipment volumes were down more than 2%, although the impact of last year's recall of certain smokeless products made comparisons slightly less meaningful. Even the strong Copenhagen brand only managed volume gains of 0.4%, and total market share in the segment fell by two-tenths of a percentage point to 54.1%.

Only the wine unit truly stood out positively. Ste. Michelle Wine Estate saw revenue jump 11%, with a 6% rise in shipments to 1.9 million cases helping to lift operating company income by 8% from the second quarter of 2017.

Can Altria get fully on track?

CEO Howard Willard explained the results. "Our core tobacco businesses performed well," Willard said, "as they continued to make strategic investments in support of their long-term objectives." The new CEO also pointed to lower tax rates as playing an instrumental role in supporting the bottom line.

Altria also highlighted the extent to which it's returning capital to shareholders. During the quarter, the tobacco giant paid out more than $1.3 billion in the form of dividends to its investors. In addition, it also repurchased about $437 million in stock, paying an average of $57.65 per share to buy back roughly 7.6 million of its shares.

Looking forward, Altria got a bit more optimistic about its earnings prospects. The company narrowed its guidance for adjusted earnings per share to a 16% to 19% growth range. That implies $3.94 to $4.03 per share on its bottom line.

Altria shareholders initially weren't so sure about the tobacco giant's ability to keep doing what it's done so well in the past, but a roughly 2% sell-off immediately after the announcement quickly turned into further gains in the days following the report. Altria clearly wants to move revenue higher with its alternative product lineup, but until regulators give the go-ahead, shareholders will likely have to make do with the same successful strategy that has generated impressive bottom-line growth for years.

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