Altria Earnings: Price Increases Save the Day, but Continued Volume Declines Are Concerning

Altria MO reported $1.00 in earnings per share in the first quarter of 2023, a whisker above our estimate in spite of weaker cigarette volumes than we had anticipated. A robust gross margin performance, in spite of higher manufacturing and distribution costs, accounted for the upside to our estimates, confirmation of our thesis that Altria will offer defensive qualities in the event of a deterioration in the health of the U.S. consumer. We retain our wide moat rating and $52 per share fair value estimate.

Despite the company’s recent efforts to diversify, smokeable products remain Altria’s core earnings driver, representing 87% of revenue net of excise taxes in the first quarter. The first-quarter year-over-year cigarette volume decline of 11.4% is somewhat concerning, especially as it follows mid- to high-single-digit declines in the last two fiscal years. The good news is that the decline is being led by the low-margin discount price segment, which fell by 24.6%, whereas Marlboro suffered more a moderate volume decline, with a fall of 10.4%, and Altria’s remaining premium portfolio declined by 12.0%. Pricing power is much stronger in premium price segments, and price/mix of 10% meant that first quarter revenue in the smokeable product segment declined by just 1.4%. The continuing decline on cigarette volume raises the question about the maintainability of the steep price increases being implemented. In the first quarter, price/mix contributed to a stable gross margin, which fell just 10 basis points from the same period a year ago, a performance most consumer product manufacturers would be envious of in the current inflationary environment. However, scale is important to Altria’s cost advantage over smaller competitors, and we expect price increases to moderate by the second half of this year in order to preserve volume.