Altria (MO) wins on low risk tobacco products and high prices

The tobacco industry has long been the hardest hit by declining cigarette sales volumes thanks to growing consumer awareness as well as strict sales regulations. In such a scenario, companies like Altria Group, Inc. MO has developed low risk tobacco alternatives to stay afloat in the industry. These products are widely accepted because of their less harmful impacts on health.

Notably, Altria is benefiting from the growth of oral tobacco and other reduced risk products (PRRs). Additionally, conservative pricing strategies support this Zacks Rank # 2 (Buy) business performance. Shares of the company have gained 7.3% in the past three months compared to the industry’s 10.3% gain. That said, let’s take a closer look at the growth factors of this well-known tobacco player.

Efforts to increase PRRs and oral tobacco

Altria is actively working to strengthen its presence in the RRP arena. In this context, the marketing and technology sharing agreement between Altria and Philip Morris International Inc. PM, regarding the sale of IQOS in the United States, is worth mentioning. We note that the United States Food and Drug Administration (FDA) approved IQOS and HeatSticks for marketing as modified risk tobacco products in July 2020. Additionally, FDA clearance on sales IQOS 3 is encouraging. Altria, through its subsidiary Philip Morris USA, Inc., is working to make IQOS available in more stores in the United States. We note that other tobacco companies such as Turning Point Brands, Inc. TPB and British American Tobacco plc BTI has expanded its offering in the area of ​​low-risk tobacco.

Apart from this, the company is working to expand the offering of oral tobacco. Altria, through its subsidiary Helix Innovations, holds 80% of the capital of certain companies of the Burger group, engaged in the marketing of the oral product in sachet of tobacco-derived nicotine (TDN) – on! In particular, on! was sold in more than 56,000 stores at the end of the third quarter of 2020, up 40% from second quarter levels. The management believes in it! is an attractive addition to Altria’s smoke-free portfolio as oral TDN products are gaining popularity in the United States due to their low risk claims. The company is also making efforts to expand into the cannabis industry. Notably, the company acquired stakes in the Canada-based cannabis company, Cronos Group.

Pricing helps increase revenue

The high prices of tobacco products have been a major asset for Altria. Although higher prices can lead to a possible decrease in cigarette consumption, it is found that smokers tend to absorb the price increases due to the addictive quality of cigarettes. During the third quarter of 2020, higher prices boosted Altria’s revenues and adjusted revenues of operating companies in the smoking tobacco and oral tobacco segments. Notably, pricing power supports Altria’s adjusted operating income despite the unfavorable tax environment and the drop in cigarette volumes.

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