Is Altria Stock A Sell After Earnings? Consider Short-Term And Long-Term Factors (NYSE:MO)

Philip Morris Changes Name To Altria

Mario Tama

Elevator Pitch

I assign a Sell investment rating to Altria Group, Inc.’s (NYSE:MO) stock.

Even though MO achieved an earnings beat in Q2 2022, both the company’s top line and shipment volume contracted in the recent quarter. I don’t think Altria can meet its full-year guidance, given the immense cost pressures for consumers in general and the high likelihood of significant downgrading to cheaper tobacco brands and products. In the long run, a key peer’s recently proposed M&A deal and the low percentage of earnings contribution from smokeless or reduced-risk products suggest that MO isn’t appealing as a long-term investment opportunity. As such, I view Altria’s shares as a Sell.

What Were Altria’s Expected Earnings?

Altria was expected to deliver a non-GAAP adjusted earnings per share or EPS of $1.25 for the second quarter of 2022. This would have translated into a bottom line growth of +1.6% as compared to MO’s Q2 2021 EPS of $1.23.

Did Altria Beat Earnings?

Altria’s actual non-GAAP EPS for Q2 2022 was $1.26, which beat the Wall Street analysts’ consensus forecast by +0.8%. This meant that MO’s EPS grew by +2.4% YoY in the most recent quarter.

But the market’s reaction to Altria’s Q2 2022 EPS beat was relatively muted. MO’s stock price declined marginally by -0.2% from $44.07 as of July 27, to $44.00 as of July 28, after the company announced its recent quarterly earnings. Altria’s last done share price was $44.23 as of August 3, 2022, which represented a minor +0.4% gain as compared to the price prior to its results announcement.

I assess Altria’s key financial and operating metrics in the subsequent section to determine why investors were unimpressed with MO’s above-expectations second-quarter earnings as evidenced by its post-results release share price performance.

MO Stock Key Metrics

MO mentioned at the company’s Q2 2022 earnings call on July 28 that the company’s bottom line growth and earnings beat for the recent quarter was mainly driven by “robust net price realization” or simply an increase in prices. But Altria’s growth for its top line and volume in the second quarter was disappointing.

As per its Q2 2022 financial results press release, Altria’s top line contracted by -4.3% YoY to $5,374 million in the most recent quarter, and its Q2 revenue was -0.9% below the market’s consensus sales projection of $5.42 billion. Notably, MO’s shipment volume for total smokeable products shrunk by -10.9% YoY to 22.9 billion sticks in Q2 2022, and its flagship Marlboro brand of cigarettes also saw a -10.3% YoY decrease in shipment volume to 20.0 billion sticks in the recent quarter. MO also disclosed in its Q2 2022 results presentation slides that Marlboro’s retail share decreased by 40 basis points YoY from 43.1% in Q2 2021 to 42.7% in Q2 2022.

It is easy to appreciate why the market was unexcited about MO’s stronger-than-expected bottom line growth for Q2 2022. The quality of the earnings beat for Altria was low, as it wasn’t supported by higher revenue and volume.

What To Expect After Earnings

I expect Altria to disappoint the market with its financial performance for the second half of the year.

Notwithstanding the company’s better-than-expected Q2 2022 bottom line, Altria has left its full-year fiscal 2022 guidance unchanged. Specifically, MO sees its non-GAAP adjusted EPS growing by 4%-7% to $4.79-$4.93 in FY 2022, as indicated in its second-quarter results media release. I am of the view that Altria’s full-year FY 2022 management guidance is still too optimistic for two key reasons.

Firstly, Altria’s actual shipment volume for smokeable products going forward might turn out to be lower than what the market expects.

Consumer Price Index And Retail Gasoline Prices

Consumer Price Index And Gasoline Prices

Altria’s Q2 2022 Earnings Presentation

As per the chart presented above, consumers are facing substantial inflationary costs pressures as seen with the increase in the Consumer Price Index or CPI and gasoline prices. It wouldn’t be surprising if consumers cut back on the number of cigarettes they consume, in response to higher gasoline prices.

Secondly, Altria’s premium brands such as Marlboro might suffer from a larger-than-expected volume decline, as consumers trade down to cheaper brands.

Discount Segment’s Market Share In The Overall Cigarette Market

Discount Segment's Market Share In The Overall Cigarette Market

Altria’s Q2 2022 Earnings Presentation

The share of the discount segment in the cigarette market has expanded by +1.3 percentage points YoY from 25.1% in Q2 2021 to 26.4% in Q2 2022, as highlighted in the chart above. This is a clear indicator that consumers are switching from premium brands to discount brands, which is negative for Altria and its premium brands like Marlboro.

In summary, the prospects for MO in the short-term aren’t favorable, and earnings misses in subsequent quarters for the company are likely.

Is MO A Good Investment Long-Term?

In my opinion, MO isn’t a good investment for the long term, due to two key factors.

The first key factor is the potential threat posed by Philip Morris International (NYSE:PM) following its planned acquisition of Swedish Match (OTCPK:SWMAF).

Assuming the Swedish Match deal is eventually completed, PM is expected to enter the US market with its IQOS-branded products after April 2024 (when the current distribution agreement between PM and MO expires), and also provide greater support for Swedish Match’s existing brands and products sold in the US. In other words, Altria’s future sales in the US might be negatively affected by the Swedish Match transaction.

The second key factor is Altria’s relatively low proportion of earnings contributed by reduced-risk or smoke-free products.

As indicated in its Q2 results presentation, MO’s smokeable products contributed $5,311 million of adjusted operating profit in the first half of 2022, which is more than six times the adjusted operating income ($837 million) that its oral tobacco products generated during the same period.

It is noteworthy that Altria has acknowledged in its Q2 2022 earnings briefing that “over 20 million U.S. smokers seek less harmful alternatives to cigarettes”, and that the company needs to “deliver a compelling portfolio of smoke-free products.”

Is MO Stock A Buy, Sell, Or Hold?

I rate MO stock as a Sell, as I am negative on Altria’s short-term outlook and long-term prospects.

Be the first to comment

Leave a Reply

Your email address will not be published.


*