Altria’s Q2 Shows Tobacco Is a Commodity Safe Haven

Altria MO beat our estimates of both net revenue growth and margins in the second quarter, allowing management to raise the bottom end of its full-year guidance. This was a strong set of results that supports our belief that the tobacco group is likely to be a safe haven from the commodity cost inflation that is plaguing manufacturers in other consumer product categories. Trade inventory movements played a large role in the volume beat, however, and as this should reverse in the coming quarters, we retain our $52 per share fair value estimate. After adjusting for channel inventory movements, second-quarter cigarette volume declined by 4.5%, which we believe is tracking slightly better than the U.S. market. Price/mix was once again very strong, at 8.5%. Mix was likely positive again, as Altria’s retail share of the premium segment ticked up by about 50 basis points over the second quarter last year to 43.2% and by 10 basis points sequentially, while the company’s discount share of 3.5% was down 40 basis points year over year and 10 basis points sequentially. Nevertheless, price would have accounted for the majority of this impressive figure, and there may be even more pricing to come in the second half of the year. BAT stated it had raised prices in the high single digits and that share had remained roughly stable. For this reason, we remain comfortable with our adjusted earnings estimate being at the high end of Altria’s full year guidance of $4.56 to $4.62 in earnings per share. The timing of the disposal of Ste. Michelle wines may affect this, however. Margins were also above our estimates. Gross margin of 66.5% and adjusted operating margin of 58.4% were both over 2 percentage points above our forecasts, boosted by higher volume--which will reverse; and by mix and price, which will not. It is also notable that marketing spending and capital expenditure have been constrained through the uncertainty of COVID-19, and that levels of spending should normalize soon.

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