EUR 850.00 For Business Accounts Only

Morningstar | Altria dominates the U.S., an attractive market with headroom for price increases.

Altria is more than a pure play on U.S. cigarettes. Over 15% of our valuation is derived from its 10.2% share of Anheuser-Busch InBev, and of the consolidated business, 15% of EBIT comes from smokeless tobacco and wine. Nevertheless, U.S. cigarettes remains the driver of Altria's earnings power, because following the breakup of Philip Morris in 2008, Altria operates solely in the U.S., while Philip Morris International, or PMI, owns the rights to the brand portfolio everywhere else.Although it has its risks and is in secular contraction, the U.S. cigarette market is a relatively attractive one. We forecast the volume decline rate of the U.S. cigarette to be around 4% per year, a slightly faster rate of decline than most markets. However, the ability to consistently price above the rate of volume declines should ensure that Altria can continue to increase its revenue, earnings, and dividend. We estimate that the U.S. is the fourth most affordable market for cigarettes among the OECD countries, as measured by the minutes of labour required to meet the retail price of a pack of 20 sticks. This allows manufacturers ample room for raising prices over time. With a portfolio skewed to the premium segment, Altria must manage the price gap over the discount segment, so this pricing power is likely to be unleashed over many years.The smokeless tobacco business appears to be holding up much better than the smokeable division. The 2017 volume decline of 1.4% was the first time volumes had fallen since Altria acquired the assets in 2009, and revenue growth has averaged 6% during that period. Copenhagen has performed particularly well, gaining 10 percentage points of share under Altria's ownership.Another positive for Altria is that it has an exclusive agreement with PMI to market iQOS, the heated tobacco technology, in the U.S., subject to Food and Drug Administration approval. The iQOS revenue share between the two entities has not been disclosed, but we suspect that significant scale will be required for margins to replicate those of Altria's premium cigarette portfolio, which makes the reacquisition of Altria by PMI more likely than not in the long term, in our view.