Is Altria a Better Buy Than Philip Morris International and Reynolds American?

Altria Group (MO 0.73%) will release its quarterly report on Thursday, and investors have been unclear about the direction the tobacco giant's shares have taken over the past six months. Falling tobacco sales volumes have consistently raised doubts about the capacity for Altria earnings growth. But Reynolds American (RAI) has faced many of the same issues, and even global giant Philip Morris International (PM 2.54%) is having to deal with the regulatory struggles that Altria and its U.S. peers have gone up against for decades.

Altria remains the largest tobacco player in the U.S. market by a wide margin, with its Marlboro brand having worldwide brand loyalty that benefits both Altria domestically and Philip Morris internationally. Yet growth has largely eluded Altria, as its domestic/international split with Philip Morris limited Altria's ability to expand into higher-growth markets around the world. Can Altria make the most of a U.S. market facing ever-increasing regulatory and popular pressure? Let's take an early look at what's been happening with Altria over the past quarter and what we're likely to see in its report.

Stats on Altria

Source: Yahoo! Finance.

Will Altria earnings keep rising higher?
In recent months, analysts have kept nearly all of their projections for Altria earnings stable, including both third-quarter and full-year 2013 estimates. They've cut their 2014 projections by a single penny per share, and the stock hasn't really moved much in response, declining about 2% since mid-July.

Altria came into the quarter on a somewhat positive note, with second-quarter earnings that showed reasonable growth. Adjusted earnings per share rose 5% in the quarter, and Altria raised its full-year guidance slightly. Yet continued weakness in what Altria calls its "smokeable products" segment led to a 2.8% drop in revenue during the quarter, with higher prices proving unable to offset a troubling 6.7% drop in domestic cigarette shipment volume. Discount brands held up well, but Marlboro and other premium products sustained even larger volume declines.

One piece of good news for Altria is that it's not the primary target of the latest regulatory push against cigarettes. In July, the FDA released a report suggesting the need for more stringent regulation of menthol cigarettes in order to curb any perception that the flavored products entice new smokers into the market. That's bad news for Reynolds American, which gets about 30% of its sales from menthol products, and could be a devastating hit to Lorillard (LO.DL) and its dominant Newport menthol brand, which helps make up menthol's almost 90% contribution to Lorillard earnings. By contrast, Altria receives little of its revenue from menthol products.

Unfortunately, Altria has lagged behind Lorillard and some of its peers in another fast-growing segment of the market: electronic cigarettes. Nevertheless, Altria is working quickly to get itself into the potentially lucrative market, rolling out its MarkTen e-cigarettes in August in an effort to catch up to Lorillard's Blu eCigs brand. Both Reynolds American and Philip Morris have also taken steps into the e-cigarette market, and depending on how various agencies choose to regulate the new market, it could be a high-growth segment for Altria and its peers.

In the Altria earnings report, watch to see whether sales of regular tobacco products continue their slide. Investors need to see signs of stabilization in cigarette volume in order to feel truly comfortable about Altria's ability to outperform Reynolds American and Philip Morris and continue delivering the dividends they've grown to rely upon.

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