In our assessment, Altria reported a mixed Q4 in its release yesterday: weak cigarette volumes were offset by cigarette pricing and smokeless and wine results while its e-cigs remain in test markets and a calendar shift in the quarter and full year (one less Monday – a key shipping day) equated to a full week of less volume. In the quarter, this equated to EPS of $0.57 that missed consensus by a penny and sales that were down -1.26% Y/Y.
For reference, our preferred big tobacco play remains long Lorillard (LO) vs short Philip Morris International (PM).
What We Liked:
- Strong pricing and lower SGA help to offset total volume weakness of -5.8% in the quarter
- Smokeless segment outperformed, with revenues -0.7% Y/Y in the quarter and +5.1% Y/Y on the year – led by brand Copenhagen
- The company reported that its e-cig offering MarkTen is performing well in its extended test market of Arizona where it's in 1,900 stores (Indiana was the first state)
- We believe that MO’s partnership with PMI (announced in December) on e-cigs and reduced-risk tobacco products – to sell through each others distribution channels and share technology – will offer substantial growth prospects and profits for MO in particular given PMI’s legacy of international sales and distribution networks
- Company says its 2014 EPS results will benefit from lower interest expense, a lower effective tax rate, and a reduction in shares from the current share repurchase program
What We Didn’t Like:
- Q4 Cigarette volumes were down -5.8% vs industry average of ~ -4% and last quarter +1.2%
- We see Marlboro under pressure from lower-priced brands
- CEO Barrington forecasts U.S. economy and adult consumer in a similar state in 2014 as 2013
For now we’ll remain on the sidelines with MO. The quantitative levels on the stock over the intermediate term TREND suggest a bearish set-up on the stock.