Illicit E-Vapor Competition Will Undermine Smoke-Free Revenue Goals By 2028

Key Takeaways

• Regulatory hurdles and a growing illicit e-vapor market threaten Altria's smoke-free product goals, impacting future revenue and earnings.
  
• ITC rulings and market competition could lead to revenue declines from NJOY, with consumer downtrading affecting traditional tobacco sales.
  
• Altria's strong tobacco brands, growth in smoke-free products, and strategic cash flow management suggest potential for favorable revenue, earnings, and shareholder value growth.

Catalysts

Through its subsidiaries, manufactures and sells smokeable and oral tobacco products in the United States.

• Altria's ability to hit smoke-free volume and revenue goals by 2028 is being compromised by the growing illicit e-vapor market, which could impact revenue negatively due to competitive pressures and unregulated products.
  
• Regulatory challenges and lack of FDA authorization for smoke-free products limit Altria's ability to capitalize on the smoke-free segment growth, potentially affecting future revenue and earnings.
  
• The ITC ruling in favor of JUUL over NJOY patents could lead to a market withdrawal of NJOY ACE products, impacting revenues and net margins if alternate solutions or settlements are not found.
  
• Altria's reassessment of NJOY's financial targets due to the competitive environment and regulatory uncertainties indicates potential downward adjustments in expected earnings from NJOY.
  
• Continued consumer financial pressure and downtrading within the cigarette category combined with increased competition from illicit products may lead to lower revenues and compressed net margins in the traditional smokeable segment.

Altria Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Altria Group's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 55.0% today to 44.1% in 3 years time.
• Analysts expect earnings to reach $9.0 billion (and earnings per share of $5.51) by about March 2028, down from $11.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 8.7x today. This future PE is lower than the current PE for the US Tobacco industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 1.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

Altria Group Future Earnings Per Share Growth

Risks

• Altria's core tobacco businesses delivered solid income growth and margin expansion due to their leading brands, which can positively impact revenue and net margins.
  
• Altria's smoke-free products, NJOY and on!, showed strong volume and share growth, indicating potential for future earnings growth in the smoke-free segment.
  
• NJOY received the first marketing granted order from the FDA for its menthol e-vapor products, potentially supporting future revenue growth in the regulated e-vapor market.
  
• On! achieved profitability ahead of schedule and grew its share in the oral tobacco segment, which suggests positive impacts on net margins and earnings.
  
• Altria returned over $10.2 billion in dividends and share repurchases, reflecting strong cash flow management and potential future shareholder value, which could influence stock price positively.

Valuation

• The analysts have a consensus price target of $56.357 for Altria Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $73.0, and the most bearish reporting a price target of just $42.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.5 billion, earnings will come to $9.0 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $57.79, the analyst price target of $56.36 is 2.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.