Altria Group Needs to Get Back to Fundamentals

Missing from this list of Altria businesses is its stake in SABMiller. Image: Altria Group.

A lot has happened with Altria Group (MO 0.84%) over the past couple of months, as the high-profile $104 billion buyout offer of SABMiller from Anheuser-Busch InBev (BUD +8.65%) has focused a lot of attention on the fact that Altria has a sizable stake in the beermaker. Yet with the company announcing its third-quarter financial results on Thursday, Altria shareholders need to see signs that the company is keeping its focus on its core business, especially now that the SABMiller transaction's structure has apparently put any concerns about major tax ramifications for Altria to rest. Fortunately, Altria has had positive momentum on the tobacco front as well, so investors are hopeful for solid results from the company. Let's take an early look at what's been happening with Altria Group and how it can keep moving forward.

Stats on Altria Group

Source: Yahoo! Finance.

Will Altria earnings rise like smoke?
Investors have had mixed views on Altria earnings in recent months, making minor downward revisions to their predictions for the third quarter but pushing up full-year 2015 and 2016 projections up slightly. The stock has risen to new all-time highs, with gains of almost 15% since late July.

Fundamentally, Altria has been firing on all cylinders, and its second-quarter results in late July showed the extent to which the tobacco giant has managed to grow successfully even in the face of ever-present obstacles. Sales during the quarter climbed nearly 6%, and net income rose at an even faster 15% pace that surprised even optimistic investors in Altria. Surprising rises in cigarette volume combined with solid performance from the smokeless-products division and from the Ste. Michelle wine business helped produce a nice bump higher for Altria's growth, and a new stock-buyback program also helped add to the enthusiasm about the stock.

Yet the obvious push that sent Altria soaring was Anheuser-Busch InBev's offer to buy SABMiller, which first surfaced in mid-September and quickly evolved into a series of proposed offers that culminated in the current agreement in principle in October. Under the arrangement, Altria will be able to exchange its SABMiller shares for a sizable stake in Anheuser-Busch, taking only a relatively small amount of cash in the deal. Although the mix of stock and cash will be worth less than what shareholders who elect the all-cash option will receive, Altria will be able to shelter the impressive gain it has on its investment in SABMiller from the lion's share of capital gains tax liability as a result of the alternative compensation structure. As much attention as the SABMiller deal will get in the months to come, Altria still needs to focus on its core tobacco business.

Fortunately, Altria recently got some positive news on the tobacco front, as it successfully settled a long-standing legal dispute with the New York state government. Under the suit, Altria and other cigarette manufacturers argued that state governments weren't working as hard as possible to get some of their competitors that hadn't signed a key master settlement agreement to contribute toward reserve funds to cover smoking-related costs. The deal will result in a $126 million credit for Altria's Philip Morris USA division, with $718 million going to the New York state government from an already existing escrow account. The deal brings the number of states that Altria has settled with to almost two dozen.

In the Altria earnings report, it will be important for investors to see how much time the company spends talking about SABMiller and Anheuser-Busch InBev compared to its core tobacco and alternative-products businesses. Although SABMiller has indeed been an essential part of Altria's diversification of its income streams beyond cigarettes and related products, the tobacco company can't afford to turn its back on its cash-cow segment. Ideally, Altria will realize the importance of keeping its focus and deliver encouraging prospects for its tobacco business as well.