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Morningstar | Altria Misses in 2Q as Weak Trends Persist

In our first-quarter comments, we noted the heightened competition in the U.S. cigarette industry from the discount sector could increase the customer acquisition cost, and this seemed to play out in the second quarter. Altria's net revenue declined by almost 4%, reversing the growth achieved in the first quarter. The firm would have to have a strong second half to meet our forecast of a 0.5% increase for the full year, but we are maintaining our estimates for now, as well as our $64 fair value estimate and wide economic moat rating, because volume trends were distorted by trade inventory movements and because our full-year EPS estimate of $3.96 remains within the new guidance range of $3.94 to $4.03.

Altria's net revenue excluding excise taxes fell by 3.7%, driven by a 6.3% decline in the smokeable business. Cigarette volumes fell by 10.8%, although when adjusted for trade inventory movements, this figure was roughly 5%. In the first half of the year, Atria's net revenue has declined 1.1%. For context, BAT, now in control of the former Reynolds American, was flat over the same period, and Altria has lost 80 basis points of share through the course of this year. The revenue decline weighed on EBIT growth, but lower promotional investments meant that the margin expanded by a respectable 110 basis points.

We are comfortable with our EPS estimate at the lower end of guidance. The gathering storm of higher retail gas prices and other inflationary pressures seem likely to continue to be a drag in the short term. Longer term, we expect competition to revert to being fairly rational, and Altria's continued bets on the premium end of the market  (including last year's acquisition of Nat Sherman) should pay off.