U.S. tobacco giant Altria Group Inc. (NYSE:MO) — parent company of Philip Morris International Inc. (NYSE:PM) — reported better-than-expected earnings this morning.
But, with a growing shift in the industry from traditional cigarettes to the e-cigarette, MO stock investors shouldn’t expect business as usual moving forward.
On the earnings front, Altria posted earnings of 63 cents per share after adjusting for special items, beating Wall Street’s estimate of 62 cents per share. Revenue after adjusted for taxes came in at $4.27 billion, again beating the street’s prediction of $4.13 billion.
The Altria earnings beat came from higher cigarette prices and increases volume. A large portion of that volume jump came from Altria’s top brand, Marlboro, which saw market share rise to 44% while volume increased 1.2%, translating into 25.1 total Marlboro cigarettes sold during the quarter.
Overall, Altria had another great quarter and the company expects full-year 2015 profit of $2.75 to $2.80 per share.
Additionally, management believes it will spend the remaining $326 million it has set aside for share-repurchases, by the end of 2015. During the first quarter, Altria repurchased $192 million worth of MO stock at an average price of $53.03 and spent approximately $1 billion in dividends.
Seeds of Worry for MO Stock
On the surface, everything seems great for MO, but the ground underneath the company may be rapidly changing.
First, back in the fourth quarter of 2014, rumors began spreading that Altria might sell its 27% stake in SABMiller plc (ADR) (OTCMKTS:SBMRY). At this point, most believe the possibility for the deal is slim; if Altria sold its SABMiller stake, the company would receive a one-time windfall but lose as much as $900 million or 46 cents per share of yearly earnings moving forward.
The real question is to what the company would do with the massive cash pile it would receive from the sale. At the moment, however, there’s no obvious answer to that question.
The second issue MO stock is facing is the large push for regulation on the e-cigarette market. While more regulation is not new for Altria, the overall impacts of those regulations and how they will be framed is unknown. Uncertainty is a major weight on any stock, and MO stock will certainly feel it until these regulations are rolled out.
While Altria is the king of cigarettes as it owns the top brand in Marlboro, the e-cig market is still the wild west. It’s filled with lots of little players and no clear sign of a dominant brand at this point. If Altria doesn’t have a top brand when the industry shakes out, MO stock will certainly take a hit, especially if regular cigarette smokers continue to shift to e-cigs.
Lastly, from a business standpoint, one of the greatest things about the cigarette industry was the simplicity of its product. The cigarette hasn’t seen much change or innovation in its inputs, design or manufacturing since its inception. The e-cigarette is now changing all of that. Altria, Lorillard, Inc. (NYSE:LO), Reynolds American Inc. (NYSE:RAI) are now spending billions on market research and development, which means costs are piling up in a big new way.
Bottom Line for MO Stock
Cigarette companies have been hands-down some of the best stock performers over the past few decades, even though the number of actual smokers fell dramatically. Over the past five years MO stock is up 220%, LO stock is up 245%, RAI stock is up 265%, gain while the S&P 500 is up just 93%.
And if you go even further back, the numbers are almost unbelievable. Since January 1970, MO stock has posted a total return of … 423,000%. If you had invested $1,000 back then, you would have $4 million today.
Investors shouldn’t expect such absurd gains going forward, as the industry itself shifts and technology changes the playing field. However, due to the safety of Altria’s 4% dividend, the company’s dominant position within the tobacco industry and its diversity with the SABMiller position, MO stock is one investors should still own today.
As of this writing, Matt Thalman is long Altria. Follow him on Twitter at @mthalman5513.
