Altria Earnings: Volume Better Than Feared, and Cash Flows Remain Stable

Altria MO reported second-quarter results that were a whisker below our forecasts, while margins improved slightly, representing a decent performance in light of tighter tobacco regulation in the United States and increasingly challenging macroeconomic conditions. The headline numbers of revenue net of excise tax up 1.5% year over year and earnings per share growth of 4% are representative of what we believe Altria can deliver in the medium term, and we are retaining our $52 per share fair value estimate and our wide moat rating. The current market price offers moderate upside to our valuation, and we think Altria could provide a fairly attractive defensive holding, paying a dividend yield of 8%, although the concentration in the U.S. market may increase risk and volatility relative to competitors such as Philip Morris International and British American Tobacco.

Second-quarter net revenue increased by 1.2% year over year, a sequential improvement from the modest decline in the first quarter. As usual, this was driven by price increases, and volume was again weak. In this vein, cigarette volume fell by 8.7% in the second quarter, with the discount segment particularly weak, down 24.4%. These figures were slightly better than those of the first quarter, despite the flavor ban in California coming into effect. We expect this will have slight drag on volume throughout the rest of the year, but on the evidence of the second quarter, it will not throw volume too far off its recent trend. The sharp decline in the discount segment appears to be an industrywide trend and indicates that low-income consumers are quitting cigarettes at faster rates than higher-income consumers are trading down.