Why Altria Could Jump on Its Q3 Earnings Beat


Oct. 31 2019, Published 10:04 a.m. ET

  • Altria stock could gain from its stronger-than-expected third-quarter earnings results.
  • Higher pricing and lower promotions drove its top and bottom line growth.
  • A third-quarter beat, a low valuation, and a high dividend yield could support Altria stock.
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Altria stock could gain

Altria (MO) posted better-than-expected third-quarter earnings results today. As we expected, lower cigarette shipment volumes remained a drag. However, higher pricing, fewer promotions, and cost reductions helped the company beat Wall Street’s expectations. Altria posted adjusted EPS of $1.19 on revenue (net of excise taxes) of $5.41 billion.

We think a third-quarter beat, low valuation, and a high dividend yield could help Altria return to a growth trajectory. Moreover, expected moderation in the decline rate of cigarette shipment volumes should further support Altria stock. However, in the short term, regulatory hurdles for Juul Labs and weak cigarette volumes could continue to limit the company’s upside.

Notably, both Altria and Philip Morris (PM) are facing sluggishness in cigarette shipment volumes. The consumer shift toward e-cigarettes and growing health awareness have been hurting these companies’ volumes.

Domestic volumes

During the third quarter, Altria’s domestic cigarette shipment volumes (smokeable products) decreased by 6.6%. Meanwhile, Philip Morris’s cigarette shipment volumes fell 5.9% in the third quarter.

Altria also reaffirmed its guidance around cigarette shipment volumes. The company continues to expect a 5.0%–6.0% decline in US cigarette shipment volumes. However, it’s increased the lower end of its EPS guidance range. It now expects its adjusted EPS to be $4.19–$4.27, representing a YoY (year-over-year) rise of 5.0%–7.0%. Earlier, it expected its adjusted EPS to be in the range of $4.15–$4.27.

Altria is trading at a forward earnings estimate of 10.4x, lower than the industry average of 20.3x. Its valuation looks compelling given its 7% EPS growth projection for 2020 and its dividend yield of 7.3%.

Third-quarter earnings: Key financials

Altria posted revenue net of excise taxes of $5.41 billion, which increased 2.3% YoY and came in ahead of analysts’ consensus estimate of $5.34 billion. Higher pricing and lower promotions drove its third-quarter revenue. However, the continued decline in its shipment volumes remained a drag.

The Smokeable Products segment’s revenue rose 2.5% driven by higher pricing. However, domestic cigarette shipment volumes fell 6.6%. The Smokeless Products segment’s revenue rose 6.3%. However, shipment volumes fell 2.5%.

Altria’s operating income jumped 15.1%, reflecting lower promotions and a reduction in costs. Moreover, higher pricing further drove its operating income.

Altria posted adjusted EPS of $1.19, up about 10% YoY. It handily beat analysts’ estimate of $1.15. An increase in operating income and a lower outstanding share count supported Altria’s earnings.

In comparison, Philip Morris’s third-quarter earnings also came in ahead of analysts’ estimate. However, its revenue fell short of analysts’ expectations due to a decline in shipment volumes.

Philip Morris’s revenue rose 1.8% YoY to $7.64 billion led by higher pricing. PM’s adjusted EPS of $1.43 came in well ahead of Wall Street’s consensus estimate of $1.36.


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