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Altria’s 1Q16 Gross Margin Rose—What about Its Operating Margin?

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1Q16 operating margin

Altria Group’s (MO) 1Q16 gross margin rose to 58.6% compared to 57.9% in 1Q15. The rise resulted from higher pricing.

MO’s operating income rose 6.0% to ~$2 billion in 1Q16 compared to $1.9 billion in 1Q15. This was due to rises in operating income in all of the company’s reportable segments.

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Operating income margin

Despite a rise in its operating income, Altria’s operating margin saw a slight fall. MO’s operating margin fell 2 basis points to 43.6% in 1Q16 compared to 43.7% in 1Q15. The impact on the company’s operating margin was due to higher pricing, higher volumes, and the benefit of the federal tobacco quota buyout expiration. These factors were offset by lower volumes.

Similarly, Philip Morris International’s (PM) 1Q16 operating margin fell 2.8% to 41.9%. This was primarily due to lower adjusted operating income, mainly in EEMA (Eastern Europe, the Middle East, and Africa) and Asia, and higher costs in support of reduced-risk products.

However, Reynolds American’s (RAI) adjusted operating income rose 72.4% to $1.3 billion in 1Q16. This was due to strong results delivered by RJR Tobacco’s addition of the Newport brand after its Lorillard’s acquisition and related divestitures to Imperial Tobacco (ITYBY).

Altria’s reported net earnings rose 19.6% to $1.2 billion in 1Q16. This was due to lower losses resulting from Altria’s early extinguishment of debt, lower interest, and other debt expenses.

Pricing realization

Altria plans to protect its margins through higher pricing realization, which would be in line with the long-term trend. However, during economic uncertainty, consumers purchase lower-priced brands, which significantly affects the volume of premium-priced and mid-priced brands and their profitabilities. Hence, higher prices could reduce volumes.

In the coming parts of the series, we’ll focus on Altria’s stock’s reaction after its 1Q16 results as well as its valuation multiple in comparison to its peers’.

MO makes up 1.5% of the PowerShares High Yield Equity Dividend Achievers ETF (PEY).[1. Updated as of April 30, 2016]

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