Altria's Underlying Trends Intact in First Quarter

Underlying trends in the U.S. cigarette industry appear to be intact following Altria's MO first quarter results, which included very strong shipment numbers, with comparability affected by a number of technical issues. Aside from adjusting for the timing of some of the company's shipments that were brought forward into the first quarter, we are making only modest tweaks to our estimates for the remainder of the year and our longer-term outlook is unchanged. We are reiterating our wide moat rating and $54 fair value estimate. As of May 4, Altria continues to appear undervalued, although we think there is more upside to Imperial Tobacco and Philip Morris is the more defensive, high-quality pick of the group.

Reported cigarette shipment volume was up by 6% in the first quarter, although when adjusting for trade inventory movements, significant pantry stocking by consumers, and an extra trading day, volumes fell by 3.5%. This was in line with recent trends, but Altria lost 60 basis points of retail volume share in cigarettes over the same period a year ago, which management attributed to older smokers returning to the cigarette category from vaping into the discount segment. It seems likely that Altria's share could continue to decline over the next year or so, particularly if the U.S. enters a sustained recession. Management reiterated its guidance of industry volume decline rate of 4% to 6% this year, although it abandoned all other guidance for the year.

The spread of COVID-19 caused some disruption during the quarter, with the Richmond, VA manufacturing facility being temporarily closed. That plant has now been reopened and we do not anticipate any distribution disruption. The pandemic has also caused management to slow the planned rollout of iQOS in the U.S. Our view is unchanged in that adoption is likely to be very slow, especially in light of the risk of recession.

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