Altria Earnings: Risks Mount but Valuation Is Becoming Hard to Ignore

Altria MO reported third-quarter earnings per share of $1.19, in line with our estimate, but volume and revenue were a little light. Investors reacted negatively, with the stock down 8% in the day’s trading following the release of results, most likely in response to management’s effective lowering of full-year earnings per share guidance to a range of $4.91 to $4.98 to $4.89 to $5.03. The cigarette industry volume decline continues to be faster than its historical trend, and the imminent ban on menthol cigarettes could further accelerate that decline. However, the stock was trading at 8 times the midpoint of 2023 earnings guidance at the close of trading on Oct. 26, implying a dividend yield of 10%, which we believe undervalues the cash flows the business is likely to generate in the future. Although we have lowered our full-year earnings estimate by $0.02, this has no valuation impact and we retain our $52 per share valuation and our wide moat rating.

Most line items were consistent with our expectations in the third quarter, with revenue net of excise taxes declining by 2.5% year over year to $5.2 billion. The only material deviation from our expectations was the 11.6% decline in cigarette volume. Altria lost 90 basis points of retail volume share against the third quarter a year ago, although shares stabilized sequentially. In the nicotine patch category, on! reported its first sequential volume decline, with a third-quarter volume of 28.7 million packs, down 4.3% over the second quarter but still up 36.7% year over year. Altria became less aggressive on pricing in the quarter, which is likely to have a positive readthrough for Philip Morris International if Altria maintains that strategy.

Altria delivered 170 basis points of operating margin improvement in the third quarter, with the smokeables margin up 70 basis points, mainly thanks to product mix and pricing, and an impressive 290 basis points in oral tobacco as the company pivoted its pricing strategy.