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Morningstar | Altria Misses in 1Q; Upside Remains But We Become Incrementally Less Optimistic about Medium Term. See Updated Analyst Note from 28 Apr 2019

We are lowering our fair value estimate for Altria to $58 from $62 after eliminating the assumption of EBI growth in stage 2 of our model. We already believed Altria's 2019 guidance of mid-single-digit adjusted EPS growth would be a stretch, and first-quarter results undershot consensus, driven by soft combustible volumes. The challenges facing Altria are reflected in our negative moat trend rating, but we still believe the firm can continue to generate economic profits for many years to come and we reiterate our wide moat rating. We retain near-term estimates below that of consensus, but we think there is upside to the stock following the market's negative reaction to the report.

The key question for investors is whether another soft quarter is indicative of a longer-term financial malaise. The underlying trend of cigarette volume declines has accelerated from 3% to 4% historically to 4% to 5% recently, but even after adjusting for channel inventory changes, management estimates industry volumes declined 7% in the first quarter. We do not recommend investors read too much into the volume data from any given quarter, but it is becoming increasingly difficult to believe Altria can sustain revenue and EBIT growth in the face of volume decline acceleration. Share of the nicotine industry is moving away from cigarettes to vaping, and although Altria now has a 35% stake in JUUL, the market leader, the migration to vaping is sub-optimal for Altria because of its lower share of the category profit pool and because we expect vaping to be lower margin than premium cigarettes. Our base case assumption is that margins will mildly decline over the next five years due to negative mix and fading opportunities to cut costs. EBIT was roughly stable in the first quarter, despite the volume shortfall, and the adjusted margin was 360 basis points above that a year ago. It is doubtful, however, that such margin improvement will be sustainable beyond the next few years.