Can Smokeless Unit Help Altria (MO) Make a Comeback in 2018?

Altria Group Inc. MO , which has a solid base in the tobacco industry, has been bearing the brunt of receding consumer enthusiasm toward tobacco products as well as stern regulations by government bodies.

Nevertheless, Altria is not all out of hopes and has been leaning on reduced risk tobacco products to remain afloat in the market. We expect this category to be a major growth driver in 2018.

Well, let's delve deep into the troubles looming over this tobacco giant, and see if its strategic endeavors can help it witness a turnaround in 2018.

Major Deterrents in Altria's Growth Story

Persistent declines in cigarette volumes have been dragging down Altria's smokeable category's performance. This has led to a fall in the company's retail market share. In the preceding four quarters, shipment volumes in the smokeable segment declined 6.1%, 2.7%, 2.6% and 4.7%, respectively. In fact, Marlboro, one of Altria's prominent cigarette brands, registered a 6% decline in volumes in third-quarter 2017.

Regulatory hurdles in the form of limitations on marketing, anti-smoking campaigns and higher excise duties are the primary reasons for the unit's drab performance. Battered by these factors, Altria's top line lagged the Zacks Consensus Estimate in seven out of the last nine quarters.

Government Initiatives to Control Smoking

Since smoking isn't a proud practice, regulatory bodies have been chalking out plans to lower this habit. Per the November 2017 court order, companies manufacturing cigarettes must make consumers aware of the health implications of smoking through advertisements via television channels, newspapers, websites, store displays and cigarette packs. The directive was issued after the federal authorities came to a conclusion that companies need to be proactive in informing consumers about the hazards of tobacco consumption. Moreover, in July 2017, the FDA directed companies to lower nicotine in cigarettes to non-addictive or minimally-addictive levels.

Further, the FDA declared that companies manufacturing tobacco products must seek marketing authorization for any tobacco products introduced after Feb 15, 2007. In May 2016, the FDA amended this restriction to include e-cigarettes, pipe tobacco, cigars and hookah alongside traditional tobacco products. Moreover, the European Union and the FDA have proposed a ban on menthol in accordance with the Tobacco Control Act which essentially states that menthol cigarettes have an adverse impact on public health.

Such actions have been a curse for a number of firms in the multi-billion tobacco industry such as Altria, Philip Morris PM , British American Tobacco BTI and Vector Group VGR . The aforementioned moves along with rising health consciousness among consumers have resulted in lower cigarette consumption globally. Notably, shares of the company have lost 4.3% in the past six months, faring somewhat better than the industry 's decline of 7.8%. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here . )

Can Smokeless Unit Offer Respite in 2018?

FDA's strict regulations have compelled Altria to resort to smokeless tobacco products to remain afloat in the industry. Smokeless tobacco products are considered less harmful than traditional cigarettes. Owing to greater acceptability for such products, Altria has introduced several reduced risk tobacco products. Its flagship MarkTen and Green Smoke e-vapor products have been performing well in this category. Incidentally, MarkTen is now a leading e-vapor brand in the United States, with a retail market share of approximately 13.5% in mainstream retail channels, as highlighted in the company's third-quarter 2017 results.

Encouragingly, during the second and third quarters, revenues (net of excise taxes) from the Smokeless tobacco category advanced 8.6% and 4.5%, respectively. Also, total smokeless products retail share grew 1.1 percentage points to 53.8% during the third quarter.

Further, Altria's marketing and technology sharing agreement with Philip Morris, which is currently under the FDA's review, can prove to be beneficial for both companies for tapping greater opportunities in the e-cigarette realm. Upon FDA clearance, Altria will gain exclusive rights to distribute two of Philip Morris' heated tobacco products or iQOS in the United States. We note that iQOS products have been a great hit in foreign markets, especially in Japan. This underscores the potential held by reduced risk products, which is expected to improve Altria's market share going ahead.

Wrapping Up

While it's not quite apparent how Altria's cigarette line up will perform post the new marketing and nicotine regulations, the company's advancements in the reduced risks products category appears quite noteworthy. However, it remains to be seen if the strength in the smokeless category can help this Zacks Rank #3 (Hold) company to make a comeback in 2018.

You can see  the complete list of today's Zacks Rank #1 (Strong Buy) stocks here .

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