Smoke-free Expansion Will Reshape US Nicotine Market Despite Risks

Key Takeaways

• Altria's investment in smoke-free products aims to boost revenue and solidify its position in the U.S. nicotine market.
  
• Efforts to stabilize the legal market and a strong focus on shareholder returns could enhance earnings per share and investor appeal.
  
• Illicit e-vapor competition, legal risks, and economic pressures threaten Altria's revenue, impacting its smoke-free goals and reliance on traditional tobacco products.

Catalysts

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

• Altria is investing in its smoke-free products, NJOY and on!, which have showed promising volume and share growth. The expansion of these products is expected to impact revenue positively as the company aims to solidify its position in the U.S. nicotine space.
  
• The ongoing acceptance and increasing consumer demand for smoke-free alternatives, which now account for approximately 45% of the total nicotine space, suggests a growing market that could enhance Altria's revenue and market share.
  
• Altria's advocacy for a well-regulated market, including increased enforcement against illicit market activities, aims to stabilize the legal market for smoke-free products, thereby protecting and potentially growing margins and improving earnings.
  
• The introduction of new smoke-free products like Ploom and expansion into the oral nicotine pouch market with on! PLUS in international markets, anticipates boosting revenue through product diversification and capturing additional market segments.
  
• Altria's commitment to shareholder returns through significant cash dividends and a newly authorized $1 billion share repurchase program is expected to enhance earnings per share, making the stock potentially more attractive to investors.

Altria Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Altria Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Altria Group's revenue will decrease by 0.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 55.0% today to 44.2% in 3 years time.
• The bullish analysts expect earnings to reach $9.2 billion (and earnings per share of $5.64) by about April 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 price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the US Tobacco industry at 16.2x.
• 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 7.1%, as per the Simply Wall St company report.

Altria Group Future Earnings Per Share Growth

Risks

• The proliferation of illicit disposable e-vapor products is threatening the legitimate market, which could adversely affect Altria's smoke-free revenue goals and NJOY's financial targets due to increased competition from unregulated products.
  
• Litigation risks, including an unfavorable ITC ruling against NJOY in JUUL's case, could potentially exclude NJOY's ACE products from the market, negatively impacting revenues from FDA-authorized e-vapor products.
  
• The growing shift of consumers to illicit e-vapor products due to insufficient authorized alternatives could lead to further declines in cigarette sales, impacting total revenue as Altria struggles to convert consumers to its authorized smoke-free offerings.
  
• The company's heavy reliance on traditional tobacco products, amidst increasing legal and regulatory scrutiny, poses long-term sustainability risks, potentially affecting future revenues and net margins if regulatory pressures lead to reduced tobacco consumption.
  
• Economic pressures on lower-income consumers, Altria's primary market, may lead to a preference for discount brands, thereby shifting consumer spending away from premium products like Marlboro and impacting overall profit margins.

Valuation

• The assumed bullish price target for Altria Group is $70.98, which represents two standard deviations above the consensus price target of $57.14. This valuation is based on what can be assumed as the expectations of Altria Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 $46.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $20.9 billion, earnings will come to $9.2 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 7.1%.
• Given the current share price of $58.82, the bullish analyst price target of $70.98 is 17.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.