Tobacco giant Altria Group (MO 0.49%) has led its industry for decades, finding ways to keep profits rising even as cigarette smoking has become less popular. With interest in tobacco seemingly in a permanent state of decline, some investors think that marijuana would be a better market for Altria to pursue.
Coming into the company's third-quarter financial report last week, Altria investors were hoping that the tobacco giant would still be able to deliver earnings growth despite the long-term trends among smokers. Altria succeeded on that front, but it remained relatively quiet about its plans for the cannabis market, instead taking steps to address more immediate concerns about e-cigarettes.
Image source: Altria.
How Altria did
Altria's third-quarter results marked a good rebound from a poor showing three months ago. Revenue net of excise tax climbed 3.3% to $5.29 billion, which was about $85 million more than most of those following the stock had expected to see. Net income was up 4% to $1.94 billion, and the resulting adjusted earnings of $1.08 per share came in just above the consensus forecast among investors for $1.07 per share on the bottom line.
From a segment perspective, Altria's results were reasonably solid across the board. Revenue from the key smokeable products segment, which includes the Marlboro cigarette division, rose 2.7% from year-earlier levels. That came despite substantial declines in cigarette shipment volumes, which were down 3.7% from the third quarter of 2017. That combination left the unit's operating company income roughly unchanged over the period, and margin levels were down due to higher costs that were offset by higher selling prices. Market share overall fell half a percentage point to 50.1%.
Altria's smokeless products division did better. Revenue net of excise tax jumped more than 7%, and adjusted operating company income rose by the same 7% figure, as higher pricing was more than enough to overcome rising expenses. Shipment volume inched higher by 0.4%, and once again, the key Copenhagen brand led the way for the segment.
Altria's wine business was weaker. Revenue was mostly flat, and operating company income fell nearly 20% despite a 2.4% rise in wine shipment volume. Higher costs included some one-time employee bonuses that represented a substantial amount of the small division's overall profit.
What's ahead for Altria?
CEO Howard Willard was enthusiastic about the company's performance. "Altria delivered excellent third-quarter adjusted diluted earnings-per-share growth of 20%," Willard said, "and continued to return large amounts of cash to our shareholders." The CEO noted that Altria's tobacco business is solid, and the company is "making strategic investments to drive long-term success." Those sentiments led Altria to boost its guidance very slightly, lifting the bottom end of its projected earnings range by $0.01 to set a new range of $3.95 to $4.03 per share.
Yet on the marijuana front, Altria didn't say much. Willard's comments were limited to the following:
We are exploring opportunities in the category, and we acknowledge that it is currently federally illegal in the U.S., but we think it's worth exploring the category because that might change in the future. I'll hold back on explaining in more detail kind of how we view the category, because we're relatively early in our exploration.
Instead, Altria discussed plans to respond to the U.S. Food and Drug Administration's concerns about electronic cigarettes. Altria's Nu Mark subsidiary will remove the pod-based Elite and Apex products until the FDA issues a market order. For remaining products under the MarkTen and Green Smoke brands, Nu Mark will keep selling tobacco, menthol, and mint varieties, but discontinue all other flavors until it gets FDA approval or it can address concerns about youth use of the products. The move will put pressure on Altria's competitors, especially those for which e-cigarettes make up their primary business.
Altria shareholders were generally pleased with the report, sending the stock up between 1% and 2% after its release. Although marijuana investors will have to wait a while longer to find out the tobacco giant's cannabis plans, solid financial performance shows that Altria is doing a good job of keeping pace with its historical track record despite ever-present headwinds.
