Cigarette maker Altria Group Inc.’s (MO) adjusted earnings of 62 cents per share in the second quarter of 2013 missed the Zacks Consensus Estimate by a penny. However, the results exceeded the prior-year quarter results of 59 cents by 5.1%.
The upswing in earnings came from higher operating income in the smokeable and smokeless products segments, lower interest and other debt expense and lower outstanding shares outstanding prompted by share buyback by the company.
Revenues and Margins
Revenues net of excise taxes slipped 1.2% to $4.5 billion for the period. Revenues missed the Zacks Consensus Estimate $4.6 billion. Altria’s total revenue declined 2.8% year over year to $6.3 billion in the quarter due to lower sales of smokeable products.
In the quarter, gross profit surged 2.4% to $2.6 billion compared with the prior-year quarter due to lower cost of sales and lower excise taxes paid by the company. Operating companies’ income (operating income after operating expenses are deducted, but before income taxes and interest are deducted) increased 6.6% year over year to $2.1 billion on the back of disciplined cost saving initiatives, under Altria’s cost reduction program.
Segment Details
Effective Jan 1, 2013, the company’s reportable segments are Smokeable Products, Smokeless Products and Wine. The financial services business and the alternative products business will be reported as All Other category.
Smokeable Products Segment: Revenues net of excise tax declined 2.3% to $3.9 billion. Net revenue (including excise taxes) for the segment slipped 3.8% year over year to $5.7 billion, primarily attributable to lower shipment volumes.
Shipment volume in the quarter slipped 6.7% to 34.1 billion units compared with the prior-year quarter, primarily due to industry’s rate of decline and change in trade inventories.
However, adjusted operating companies’ income increased 1.5% year over year to $1.7 billion, reflecting higher pricing. Operating companies’ income margins inflated 1.6 percentage points (pp) to 43% during the quarter.
Smokeless Products: Revenues net of excise tax went up 6.5% to $425 million. Total revenue in Smokeless Products increased 7.5% to $458 million, fueled by higher volume and pricing.
Furthermore, adjusted operating companies’ income increased 12.5% year over year to $270 million backed by improved volume and pricing. Smokeless products’ first-quarter shipment volume went up 4.6% to 200.5 million units on the back of volume growth in the Copenhagen and Skoal brands.
Wine: The segment’s revenues net of excise tax went up 7.3% year over year to $132 million. Total revenue surged 7.0% to $137 million in the quarter, while on the back of higher shipment volume. Wine shipment volume went up 7.7% to $1.9 million units, driven by expansion in off-premise channels.
Adjusted operating companies’ income went up 13.6% to $25 million on the back of positive pricing.
Other Financial Update
Altria's cost reduction program for its tobacco and service company subsidiaries, which was announced in the fourth-quarter of 2011, remains on track. The program is expected to deliver $400 million in annualized savings by the end of 2013.
Altria repurchased 3.7 million shares at a total cost of approximately $135 million during the second-quarter of 2013. This is a part of the $300 million share buyback program announced in Apr 2013 scheduled to complete by the end of 2013.
Outlook
Altria narrowed its 2013 earnings guidance range from the previously announced range of $2.35 to $2.41 per share to a range of $2.36 to $2.41, representing a growth rate of 7% to 9% from $2.21 per share in 2012. The revision reflects benefits of the company’s cost reduction initiatives and positive pricing.
Headquartered in Richmond, VA, Altria engages in the manufacture and sale of cigarettes, smokeless products and wine in the United States and internationally and carries a Zacks Rank #3 (Hold). Other consumer staples stocks worth considering include Reynolds American Inc. (RAI), Lorillard Inc. (LO) and Tyson Foods Inc. (TSN) all carrying a Zacks Rank #2 (Buy)
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