Altria Group (MO)

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See all 5 Bulls Reasons Bulls: Reasons To Buy Costs are lower than the competition, smokers with always smoke even during recessions 100% agree Costs are lower than the competition, smokers with always smoke even during recessions Why is the cig biz so good? Altria's cost to produce 1000 cigarettes is $16.40. Talk about profit margin! This is 16% to 21% lower than the competition. As a tobacco company, Altria is somewhat shielded from poor economic conditions. Smokers will still smoke, regardless of the current interest rate. View or Edit Reason 2 votes 100% agree Altria, A 5.25% Yield and Double Digit EPS Growth: Nice 100% agree Altria, A 5.25% Yield and Double Digit EPS Growth: Nice Altria Group (MO) reaffirmed its 2008 guidance for adjusted diluted earnings per share from continuing operations in the range of $1.63 to $1.67. This represents a growth rate of approximately 9% to 11% from an adjusted base of $1.50 per share in 2007. "This full-year... read more View or Edit Reason 1 votes 100% agree Marlboro is the most popular cigarette brand in the world 66% agree Marlboro is the most popular cigarette brand in the world Altria's Marlboro is the most popular cigarette brand in the world, selling more than the next seven leading international cigarette brands combined. Not only that, it's one of the most popular brands period, up there with the likes of Coca-Cola and other iconic brands. As... read more View or Edit Reason 3 votes 66% agree See all 4 Bears Reasons Bears: Reasons To Sell "Continued risk of litigation, which could destabilize the tobacco industry" 0% agree "Continued risk of litigation, which could destabilize the tobacco industry" Continued risk of litigation, which could destabilize the tobacco industry. Though the legal environment has improved recently, the possibility of lawsuits against tobacco companies remains. View or Edit Reason 0 votes 0% agree Continued risk of litigation, which could destabilize the tobacco industry 0% agree Continued risk of litigation, which could destabilize the tobacco industry Continued risk of litigation, which could destabilize the tobacco industry. Though the legal environment has improved recently, the possibility of lawsuits against tobacco companies remains. View or Edit Reason 0 votes 0% agree Rising excise taxes will reduce profits 0% agree Rising excise taxes will reduce profits Rising excise taxes will reduce profits as governments continue to use taxation to reduce public smoking and as a source of revenue. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Tobacco is an interesting subject when looking at investments. This is a product that has the wor... more [Dismiss] [Done] See All Suggestions

Top Contributors Sean Hinton Kai Ross Todd Sullivan Related Articles U.S. Economic Cycles REYNOLDS AMERICAN (RAI) Health & Wellness Kraft Foods (KFT) Philip Morris International (PM)

In the past, Altria has focused primarily on maintaining market share in the U.S. Altria is reliant on continued consumption of its products. Decreasing social acceptability of smoking, public awareness of smoking's health risks, and rising costs due to excise taxes and litigation expenses could all lower demand for Altria's products. Litigation also poses a risk to Altria on several fronts: negative press can negatively affect demand, and the costs of with legal battles and settlements are substantial.

Despite the problems that Altria has had to face, it has remained very profitable. The company continues to lead its markets and command strong brand loyalty, making it possible to generate a still-growing profit.

[edit] History and Corporate Overview

Originally founded in 1847, Altria Group began manufacturing and selling ready-made cigarettes in response to a marked increase in smoking's popularity. Altria entered the U.S. cigarette market in 1902 and has been a dominating force in both the domestic and international tobacco industries ever since. Its flagship brand Marlboro has become the world's most popular cigarette by volume, accounting for an impressive 8.4% of all cigarettes sold around the world. In an effort to concentrate on its tobacco business, Altria has spun off both of former food/beverage companies, Miller Brewing Company (2002), Kraft Foods (2007), and its international tobacco business (Philip Morris International, 2008); however, Altria retains a 28.6% voting interest in SABMiller, the world's second-largest brewer, formed when Altria sold Miller Brewing Company to South African Breweries in 2002.

[edit] Financial Guidance:

Altria (MO):

• 2008 full-year diluted earnings per share from continuing operations were projected in Q1 2008 earnings call to grow approximately 9% to 11% from an adjusted base of $1.50, excluding PMI.
• Long term total annual shareholder return of 12.1% when combined with the dividend.
• EPS growth in the range of 8% to 10%.
• An anticipated dividend payout ratio of 75%, with an initial post-spin annualized dividend rate of $1.16 per share;
• A planned share repurchase program of $7.5 billion over the next two years, which will commence in April of this year;
• Approximately $1.00 billion in cumulative annual cost savings, $300 million of which were realized in 2007 and approximately $700 million in additional savings to be realized by the end of 2011, including cost reductions ($250 million) related to the relocation of corporate headquarters from New York, NY to Richmond, VA.
• Tests in both smokeless and snuffs are going "very well".

Altria Group is composed of two main parts:

[edit] Philip Morris USA

Philip Morris USA (PM USA) is Altria's domestic cigarette manufacturing company. It manages the production and distribution to wholesalers of Altria's U.S.-sold cigarette brands sold, including:

• Marlboro, which accounts for 80% of PM USA's total revenues and 41.5% of all cigarettes sold domestically
• Basic, PM USA's only "discount" brand, which accounts for 8% of the company's total revenues
• Virginia Slims, targeted towards women and accounting for 5% of the company's revenues
• Parliament, which accounts for 3% of the company's revenues

PM USA also manufactures several other brands, which make up about 3% of total revenue and production.

On April 24th, 2008, PM USA's total domestic market share stood at 50.9%, making it the largest tobacco company in the United States by both revenue and volume, and contributing $18.5 billion (25%) to Altria's FY 2007 consolidated revenues.

[edit] Philip Morris Capital Corporation

Philip Morris Capital Corporation (abbreviated as PMCC) is a subsidiary of Altria Group that manages a portfolio of assets, such as aircraft, manufacturing facilities, and real estate, which are leased as a form of investment. The revenues from PMCC, which totaled $220 million in 2007, are used to generate cash flow and operating income for Altria.

Source: Credit Suisse

Note: Kraft Foods was spun off in 2007 and Philip Morris International was spun off in 2008. Future revenues will not include income from this source.

[edit] Products

Following the 2007 spin-off of Kraft Foods, Altria now manufactures only tobacco products. Cigarette brands in the United States fall into one of two categories: premium brands and value brands. Currently, 92% of PM USA's revenues come from its premium cigarettes, with Basic, the only value brand, accounting for the other 8%. Internationally, PMI produces and sells over 25 different brands of cigarettes, including both premium and value brands. Marlboro is by and large Altria's largest brand, constituting 40.5% of all cigarette sales in the U.S. and 8.5% of all international sales. Altria's products enjoy significant brand loyalty and very high name recognition. As such, the product line has remained relatively unchanged. In December 2007, Altria completed the acquisition of John Middleton, Inc., a leading manufacturer of machine-made large cigars.

[edit] Economic Downturns

The tobacco industry has proven to be somewhat more resistant to the effects of economic downturns than other industries, perhaps due to the nature of their products or the brand loyalties. Cost-conscious consumers may stop smoking or downgrade to a value-priced brand during economic slumps, but most consume the same brands at the same, or slightly lower, level. As a result, Altria and other similar companies generally experience less of a decrease in revenues during recessions than the economy as a whole.

[edit] Premium vs. value brands

As cigarette prices have continued to rise, some consumers have switched from premium brands to value or deep-discount brands. Most of Altria's cigarette brands are classified as premium, making it more sensitive to these shifts in consumption than some other tobacco companies with more equally-distributed product lines. As such, Altria tries to manage the price gap between value and premium cigarettes by keeping their wholesale prices at a level high enough to be profitable but not so high that consumers start switching to value brands.

[edit] Litigation Landscape

The tobacco industry is highly susceptible to litigation. Large, high-profile court cases generate negative publicity and can be very costly for tobacco companies, even before including any damages awarded. Due to its size and significance in the domestic market, Altria is somewhat more likely than other tobacco firms to be targeted in a large lawsuit, increasing its exposure to litigation headline risk relative to that of competitors.

In 2006, however, the litigation outlook improved significantly for U.S. tobacco companies. Three important cases in the industry resulted in victories for Altria and other tobacco companies, leading to a general improvement in the litigation environment. This is a positive factor for Altria, as litigation expenses should be more predictable and stable.

[edit] Consumer Demand

The demand for Altria's products is subject to many health and wellness factors, including:

• Public awareness of health risks associated with smoking
  • The increase of public awareness about the dangers of smoking cigarettes has led to a decrease in the number of smokers (from roughly 50% of the population in the 1950s to around 20% in the early 2000s). While this factor could still affect future demand for Altria's cigarettes, the likelihood of a significant decrease in consumption due to health concerns is small, since the health risks have been widely known for some time.
• Social acceptability of smoking
  • A decrease in the social acceptability of smoking could lead to reduced rates of cigarette consumption. Conversely, a glamorization of smoking could stimulate growth in demand for cigarettes. On the whole, smoking has become somewhat less socially acceptable in the U.S., due to both shifts in cultural attitudes and government regulations on smoking. For some, though, there is still a certain glamorous quality associated with smoking. Cigarettes' social acceptability varies depending on region, however, and many of Altria's other, non-U.S. markets are not as affected by a negative public perception of smoking.

[edit] Government Regulation

Governmental regulations can have a large impact on tobacco companies' revenues and, indirectly, consumer demand. There are two main ways in which governments attempt to regulate the consumption of cigarettes, excise taxes and regulations on smoking in public places.

• Cigarette excise taxes are per-pack taxes placed on cigarettes by governments. They serve two purposes: reducing public cigarette consumption and providing a large source of revenue for treasuries.
  • These two reasons put governments, especially state governments in the U.S., in a somewhat difficult position. While many policymakers want to reduce per-capita smoking rates, the excise taxes collected from tobacco companies number in the billions of dollars annually. As a result, governments have a vested interested in the continued viability of Altria and other tobacco companies, making them unwilling allies of the tobacco industry.
  • Excise taxes have risen dramatically in the past three decades and are expected to continue upward. Elected officials have realized that the large profitability of the tobacco industry allows individual companies to absorb a significant percentage of an increase in excise taxes without passing the full cost on to consumers. As such, governments can increase revenues from tobacco companies without severely harming demand for the companies' cigarettes.
• Restrictions on cigarette consumption include bans on smoking in public places such as restaurants, workplaces, etc. In the U.S., there has been a recent increase in the number of cities with smoking bans in effect. While having no impact on private consumption of cigarettes, these bans prohibit smoking in many public places, limiting the ability of consumers to choose when and where to smoke.

[edit] Competitors

Altria's Philip Morris USA holds a 50.9% share of the U.S. tobacco market. The only two other major competitors in the domestic market are Reynolds American (NYSE:RAI), which has a 29% market share, and Carolina Group's (NYSE:CG) Lorillard, which holds 10% of the market share. The remaining 11% of the domestic tobacco industry is composed mainly of deep-discount manufacturers and other small, specialty cigarette makers. Each of Altria's two main domestic competitors has advantages and disadvantages. RAI produces more savings brands, making it likely to benefit from consumers' switching from premium to value brands. Lorillard's flagship cigarette Newport is by far the most popular brand of mentholated cigarettes. However, Altria's size and revenues put both of them at a relative disadvantage in terms of sheer heft in the industry. Both competitors are subject to the same external events, i.e. taxation, litigation, and changes in popular attitudes about smoking.

U.S. Tobacco Market, by volume, Source: Credit Suisse

Source: Credit Suisse

[edit] References

1. ↑ FY 2007 Altria Annual Report [1]