Altria Group Inc’s MO shares have lost 11.5% in the past six months, faring slightly better than the industry’s decline of 12.5%. Persistent weakness in the smokeable segment has been denting investors’ optimism on the stock.
Altria, which has a solid hold in the tobacco industry, has been undertaking initiatives to expand smokeless products segment that has been gaining traction of late.
Lets delve into these factors and see if such efforts can provide some respite to the leading tobacco player.
Struggling Smokeable Unit
In the preceding four quarters, shipment volumes in the smokeable segment have declined 6.1%, 2.7%, 2.6% and 4.7%, respectively. While cigar volumes increased steadily, persistent decline in cigarette volumes have been dragging the smokeable category’s performance. As a result, cigarette retail market share of Altria has been falling.
Anti-smoking campaigns and government regulations have played a fundamental role in dissuading consumers from tobacco consumption. This is a major headwind for the industry. Such efforts have created mass awareness regarding adverse impacts of tobacco consumption on health. Per the recent court orders, companies will be forced to acknowledge the perils of smoking through corrective advertisements circulated via television channels, newspapers, websites, store displays and cigarette packs. The move was imposed by federal authorities considering that companies have not been informing consumers about the addictive nature of smoking.
Further, government authorities have been undertaking measures to counter cigarette consumption. In July 2017, the FDA directed companies to lower nicotine in cigarettes to non-addictive or minimally-addictive levels. Additionally, cigarette consumption rates have declined globally due to precautionary labels and higher tax rates. Apart from denting Altria’s performance, such actions have affected the business of several other tobacco industry majors such as Vector Group VGR, British American Tobacco BTI and Philip Morris PM.
Can Smokeless Products Offer Respite?
While cigarette consumption continues to be a concern for the industry, consumers have depicted rising preference for e-cigarettes and smokeless tobacco products, courtesy of less health risks.
Altria has been promptly responding to the changing market scenario and offers several reduced-risk tobacco products. Its flagship brands — MarkTen and Green Smoke e-vapor — have been performing strongly in this category. Notably, MarkTen is currently a leading e-vapor brand in the United States and reported a market share of approximately 13.5% in mainstream retail channels during third-quarter 2017. In the said quarter, revenues from the Smokeless tobacco category improved 4.5% to $515 million.
Additionally, Altria is likely to benefit from marketing and technology sharing agreement with Philip Morris, which is currently under FDA’s review. We hope that such efforts will help this Zacks Rank #3 (Hold) company to stay afloat amid tough industry conditions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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