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Just How Scary Will Altria's Q3 Earnings Be?

By Rich Duprey - Oct 27, 2019 at 1:37PM

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The tobacco giant will be hard-pressed to find much good news to share when it reports results on Halloween.

It's going to be difficult for Altria (MO 0.03%) to scare up any positive news for investors when it reports third-quarter earnings on Thursday, Oct. 31. Although the tobacco giant began marketing the IQOS heated tobacco electronic cigarette from Philip Morris International (PM -0.05%) recently, which has some potential to make a splash in the alternative products market, it will be haunted by the e-cig health scare crisis that erupted this quarter and its impact on industry leader Juul Labs, in which Altria holds a large minority stake.

Investors will want to see whether Altria can mask the drumbeat of bad news that has befallen the industry when it releases results on Halloween.

Man with green headphones smoking a cigarette

Image source: Getty Images.

The good news

Because of the inelasticity of demand in the tobacco industry that reflects how many smokers are willing to pay up in order to keep buying cigarettes, Altria raised prices for the third time this year. That's not going to play much of a role in its third-quarter results, but the tobacco giant will still be reaping the benefit from the two price increases it made earlier in the year.

Those increases allowed Altria to beat analyst revenue expectations in the second quarter, and it bolstered profits, too, which rose 6% from the year ago period. They're likely to have the same effect this time around, even though shipment volumes will have declined again.

Last quarter, the Marlboro brand owner revised its full-year guidance to a decline of 5% to 6% from its previous outlook of 3.5% to 5% drop after they fell 7% in the quarter. That was also worse than the industry as a whole, which saw a 6% decline.

Analysts expect Altria to essentially match revenues from the year-ago third quarter, forecasting a consensus view of $5.28 billion. Expected earnings of $1.14 are 5.5% above last year's $1.08 per share.

The bad outweighs the good

The electronic-cigarette market seems to be unwinding right before Altria's eyes. The Food and Drug Administration is cracking down on e-cigs, proposing to ban all flavored e-liquids to discourage teens from using the devices. Its $12.8 billion investment in Juul is also in jeopardy, with multiple investigations having been launched against the e-cig manufacturer as many teens find its device irresistible. 

Worse, a sudden surge in lung injuries, illnesses, and deaths following use of electronic cigarettes also grabbed headlines. While the leading theory among authorities is that the problems have been caused by an illicit brand of THC-infused e-liquid cartridges, the publicity that surrounded the FDA reporting each new batch of cases could be causing e-cig users to abandon the devices and switch back to smoking.

Analyst surveys showed the incidence of smoking climbed 1 percentage point after several months of decline, while usage volume declines also moderated. It's now believed that Altria's likelihood of being forced to write down the value of its investment in Juul Labs has "increased materially."

The incident has already played a role in causing Philip Morris International to back out of potential merger talks with Altria, as the global tobacco giant says it preferred to concentrate on sales of the IQOS. It heard from its investors, who said if they wanted exposure to the U.S. market, they could invest in Altria on their own.

What's it worth to investors?

Although Altria's stock has rallied 20% in October, it has still lost a quarter of its value over the past year because of the constant drumbeat of negative industry news. Yet at just 13 times trailing earnings and 10 times next year's estimates, the U.S. cigarette company looks cheap when compared with its earnings prowess.

Analysts still see it being able to expand earnings at a 7% compounded annual rate over the next five years, and though it sports a sky-high enterprise value-to-cash flow ratio of 100, its quarterly dividend was increased to $0.57 per share earlier this year -- its 50th consecutive year of increasing the shareholder payout -- and it yields a mouthwatering 7.2% annually.

Because of Altria's pricing power, the dividend seems pretty secure and would be a worthwhile place for income-loving investors to stake a claim.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$45.47 (0.03%) $0.01
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
PM
$101.12 (-0.05%) $0.05

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