Tuesday, April 19, 2011

Altria Group Inc. (NYSE: MO): Q1 Earnings Preview 2011

Altria Group Inc. (NYSE: MO) is scheduled to release its first-quarter financial results before the opening bell on Wednesday, April 20, 2011. Analysts, on average, expect the company to report earnings of 44 cents per share on revenue of $3.93 billion. In the year ago quarter, the reported earnings of 42 cents per share on revenue of $3.95 billion. 

Altria Group, Inc., through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. The company dominates the U.S. tobacco business, with 50% of the market. It is No. 1 in the U.S. in sales of cigarettes and smokeless tobacco and is No. 2 in cigars.

The demand for company's cigarettes has been impacted by decreasing social acceptability of smoking, increased regulation, public awareness of smoking's health risks, and rising costs due to excise taxes and litigation expenses. However, the company has managed to grow its profits despite negative press and increased regulatory actions.

In the preceding fourth-quarter, the Richmond, Virginia-based company's net income was  $919 million or $0.44 per share, compared to $725 million or $0.35 per share in the year-ago period. On an adjusted basis, the company earned 44 cents a share in the fourth quarter. Revenue rose 1.4% to $5.93 billion.  Analysts, on average, expected the company to report earnings of 44 cents per share on revenue of $4.27 billion. Altria achieved cost savings of $65 million in the fourth quarter of 2010 and $317 million for the full year. The company expects to achieve about $145 million in additional cost savings by the end of 2011 for total anticipated cost reductions of $1.5 billion versus 2006.

At its last earnings call in January, the company Altria said that it expects fiscal 2011 earnings in a range of $2.00-$2.06 per share. The forecast includes estimated net charges of $0.01 per share related to SABMiller plc special items, partially offset by estimated gains on sales of land and buildings. The company expects adjusted earnings per share for the year, excluding special items, in a range of $2.01-$2.07. This represents a growth rate of 6 to 9 percent from an adjusted base of $1.90 per share in the prior year. Altria said that it expects the first half of fiscal year 2011 to be more challenging for income growth comparison purposes than the second half of 2011, due to cigarette trade inventory movements and the timing of new tobacco product launches in 2010.

Many companies in the industry are diversifying to insure the waning smoking population does not affect their profits. Some like Altria  are investing more into their smokeless products and advertising for said alternatives. Altria owns the two leading smokeless brands, Skoal and Copenhagen, which are helping the company migrate smokers to other tobacco products as they attempt to quit. 

Cigarette manufacturers' pricing power remains intact despite increased government regulation and growing excise taxes. Manufacturers can still raise prices at a faster rate than volumes decline, creating revenue and earnings growth. This ability to pass escalating costs onto the consumer has been a boon to the industry where, generally, as the market shrinks the prices rise and margins remain stable

Altria’s diversified geographical footprint, robust cash flow, under-leveraged balance sheet, and high dividend yield supports its long-term profitability outlook.

The company's stock currently trades at a forward P/E (fye Dec 31, 2012) of 11.99 and PEG ratio (5 yr expected) of 2.33. In terms of stock performance, Altria shares have gained nearly 30 percent over the past year.

Full Disclosure: None.
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