Cigarette maker Altria Group Inc.’s (MO) adjusted earnings of 65 cents per share in the third quarter of 2013 surpassed the Zacks Consensus Estimate of 64 cents by a penny. The results also exceeded the prior-year quarter’s results of 58 cents by 12.1%.
The upswing in earnings came from higher operating income in the smokeable and smokeless products segments, lower income tax and lower outstanding shares prompted by the company’s share buyback program.
Revenues and Margins
Revenues net of excise taxes dropped 6.6% to $4.8 billion for the quarter. Revenues exceeded the Zacks Consensus Estimate of $4.5 billion. Altria’s net revenue, however, gained 5% year over year to $6.6 billion in the quarter due to strong sales in the smokeless and smokeable products coupled with higher gains from asset sales and financial service business.
In the quarter, gross profit went up 13.6% to $2.8 billion compared with the prior-year quarter due to lower cost of sales. Operating companies’ income (operating income after operating expenses are deducted, but before income taxes and interest are deducted) increased 11.8% year over year to $2.2 billion on the back of 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 went up 4.6% to $4.0 billion. Net revenue (including excise taxes) for the segment increased 3.4% year over year to $5.8 billion, primarily backed by positive pricing and higher shipment volumes.
Shipment volume in the quarter went up 1.3% to 34.4 billion units compared with the prior-year quarter, primarily due to an extra shipping day and change in trade inventories.
While Marlboro’s retail share remained flat year over year, L&M gained share during the quarter. Black & Mild, however, reported lower market share during the quarter.
However, adjusted operating companies’ income increased 3.1% year over year to $1.7 million, reflecting higher pricing. Operating companies’ income margins shrank 0.6 percentage points (pp) to 42% during the quarter.
Smokeless Products: Revenues net of excise tax went up 9.8% to $448 million. Total revenue in Smokeless Products increased 11.0% to $485 million, fueled by higher volume and pricing.
Smokeless products’ third-quarter shipment volume went up 9.5% to 212.8 million units on the back of volume growth in the Copenhagen and Skoal brands.
Although Copenhagen gained retail share during the quarter, Skoal witnessed a slight decrease primarily due to competitive activity and Copenhagen’s strong performance
Furthermore, adjusted operating companies’ income increased 9.1% year over year to $277 million backed by improved volume and pricing. Operating companies’ income margins shrank 0.5 pp to 61.8% during the quarter.
Wine: The segment’s revenues net of excise tax went up 5.9% year over year to $143 million. Total revenue surged 5.7% to $148 million in the quarter on the back of higher pricing and positive volume mix. Wine shipment volume declined 2.0% to $1.8 million units, due to change in trade inventories.
Adjusted operating companies’ income went up 7.7% to $28 million on the back of positive pricing. Operating Income margins increased 0.3 pp to 19.6%.
Other Financial Update
Altria's cost reduction program for its tobacco and service company subsidiaries, which was announced in fourth-quarter 2011, remains on track. The program is expected to deliver $400 million in annualized savings by the end of 2013.
Altria authorized an extension of share repurchase program started in Apr 2013, from $300 million to $1 billion. Altria repurchased 4.5 million shares at a total cost of approximately $156 million during the third quarter of 2013. In Aug 2013, Altria hiked its regular quarterly dividend by 9.1% to 48 cents per share as part of its strategy to maintain a dividend payout ratio of 80%.
Outlook
Altria reaffirmed its 2013 earnings guidance range of $2.36 to $2.41, representing 7% to 9% growth rate from $2.21 per share in 2012. This reflects the benefits of the company’s cost reduction initiatives and positive pricing.
Headquartered in Richmond, Virginia, Altria engages in the manufacture and sale of cigarettes, smokeless products and wine in the United States and internationally and carries a Zacks Rank #2 (Buy). Other consumer staples stocks worth considering include Constellation Brands Inc. (STZ), NU Skin Enterprises Inc. (NUS) and Pilgrims Pride Corp. (PPC). All these stocks carry a Zacks Rank #1 (Strong Buy)
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