Altria Group, Inc. Earnings: Can the Cigarette Giant Keep Growing?

Altria (MO 0.85%) will release its quarterly report on Thursday, and investors expect that the tobacco giant will come out with at least modest gains in net income and revenue. Yet given the ongoing challenges that the tobacco industry faces as well as new competitive pressures from Lorillard (LO.DL) and Reynolds American (RAI), Altria needs to move forward with new initiatives in order to ensure its long-term success.

Altria has been a huge winner over the past half-century, having survived countless regulatory threats, lawsuits, and public campaigns to reduce tobacco use and cut into its core business. Even though cigarette smoking has become less popular over that span, Altria and its peers have managed to keep profiting from the industry. Let's take an early look at what's been happening with Altria Group over the past quarter and what we're likely to see in its report.

Stats on Altria Group

Source: Yahoo! Finance.

Can Altria earnings grow a little faster this quarter?
Analysts have gotten just the slightest bit more optimistic in recent months about Altria earnings, keeping their fourth-quarter estimates steady but raising full-year fiscal 2014 projections by a penny per share. The stock has inched up by about 2% since late October.

Altria's third-quarter results were reasonably impressive, with revenue climbing 5% to produce an 8% gain in operating income. Rising prices and a 1.5% gain in shipment volume for its key Marlboro brand helped Altria's smokeable-products segment earn sales gains of 3.4%. Other premium brands posted a discouraging 7% decline in volume, although its discount brands saw better results.

Yet Altria and peers Reynolds American and Lorillard all face several long-term threats. Falling numbers of regular smokers have contributed to unattractive prospects for tobacco company sales volumes, and the ever-increasing excise-tax bite that federal and state governments collect saps profits as well. As cash-strapped customers resort to discount brands, Altria in particular will find it more difficult to sustain the full value of its Marlboro brand, potentially hitting it even harder than Lorillard and Reynolds American because of the nearly 44% market share that Marlboro commands over the U.S. cigarette market.

One area that Altria should see a competitive advantage in, though, is in menthol cigarettes. Lorillard has by far the greatest exposure to menthol, making it most vulnerable to potential FDA rules that could curb menthol cigarette sales. Altria gets even fewer sales from menthol than Reynolds, let alone Lorillard's 90% dependence on the flavor, so ironically, Altria might benefit on a relative basis from menthol regulation -- at least in comparison to its peers.

The big growth opportunity that investors want to know more about is in electronic cigarettes. Lorillard has pioneered the use of e-cigarettes, getting out to an early lead in the niche. But Altria has answered with its own MarkTen products, and although it got a late start, Altria should continue to see solid growth from the segment as long as regulators choose not to clamp down on e-cigarette use as well.

In the Altria earnings report, watch closely for the latest trends not only in dollar revenue and net income but also with sales volumes. Altria needs to keep working to minimize costs in order to survive the long-term decline in cigarette demand while looking to smokeless products and other innovations for potential growth.

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