Unregulated e-Cigarette Markets And Patent Disputes Will Erode Future Earnings

Key Takeaways

• Unregulated e-cigarette markets and patent disputes could disrupt Altria's revenue and earnings from smoke-free products.
  
• Economic pressures and price gaps may drive consumers to cheaper alternatives, impacting Altria’s revenue and margins.
  
• Altria leverages its strong Marlboro brand and smoke-free products growth to offset volume declines and enhance revenue, supported by cost savings and shareholder returns.

Catalysts

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

• The increasing prevalence of illicit e-cigarette and nicotine pouch products, which are not FDA-authorized, poses a risk to Altria’s revenues. This unregulated market may continue to grow, undermining legal products’ sales and impacting revenue growth.
  
• The ongoing litigation with JUUL regarding patent infringement could result in a ban on NJOY product imports if unfavorable rulings occur. This has potential to impact NJOY's market presence significantly, affecting future earnings from smoke-free products.
  
• Altria’s large price gap between Marlboro and competing discount cigarette brands could trigger a shift among price-sensitive consumers. This downtrading behavior can erode revenue and net margins if consumers increasingly opt for lower-priced alternatives.
  
• Economic pressures on consumers, reflected by constrained discretionary incomes and rising debt levels, could lead to higher downtrading and lower volume sales in Altria’s smokeable segment. This might impact future revenue and profit margins adversely.
  
• Despite Altria’s commitment to process modernization for cost savings, the expected pretax charges of $100 $125 million for this initiative may weigh on net margins and earnings in the short-to-medium term, until cost savings materialize and contribute to profitability.

Altria Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Altria Group's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 50.4% today to 42.6% in 3 years time.
• Analysts expect earnings to reach $8.9 billion (and earnings per share of $5.41) by about December 2027, down from $10.3 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 12.7x on those 2027 earnings, up from 8.9x today. This future PE is lower than the current PE for the US Tobacco industry at 22.6x.
• Analysts expect the number of shares outstanding to decline by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

Altria Group Future Earnings Per Share Growth

Risks

• While Altria's smokeable products segment faces volume declines, the resilience and profitability of the Marlboro brand continue to support its revenue, as evidenced by solid operating company's income growth and strong adjusted OCI margins. Continued strength in this segment could offset challenges in other areas and sustain earnings.
  
• Altria's progress in smoke-free products, particularly with NJOY and on!, demonstrates potential for future revenue streams. NJOY's significant growth in both shipment volume and retail share, along with improved consumer loyalty and satisfaction metrics, points to strong market potential, which could positively impact revenue and earnings.
  
• The optimization and acceleration initiative pursuing cost savings and process improvements is expected to deliver at least $600 million in savings over the next five years. This initiative can enhance efficiency, potentially maintaining or improving net margins even amid market challenges.
  
• Altria's commitment to returning substantial value to shareholders, highlighted by consistent dividend growth and share repurchases, reflects strong cash flow management. This shareholder-friendly policy could cushion the impact of market fluctuations on earnings and attractiveness to investors.
  
• Despite ongoing regulatory and competitive challenges, Altria's strategic investments in harm-reduction products and its ability to engage with regulators and lawmakers on addressing illicit market issues could fortify its long-term market position, supporting both revenue and earnings potential.

Valuation

• The analysts have a consensus price target of $56.8 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 2027, revenues will be $21.0 billion, earnings will come to $8.9 billion, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 6.5%.
• Given the current share price of $54.13, the analyst's price target of $56.8 is 4.7% higher. 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.