Tobacco News

Altria’s MO robust first-quarter results confirm our thesis that its strong brand portfolio positions the firm at the top of the domestic tobacco industry. Our outlook remains unchanged, and we are maintaining our fair value estimate.

Net revenue increased 4% year over year as a result of higher cigarette prices and volume growth in the smokeless tobacco business. Cigarette volume fell less than 1% in the first quarter, a dramatic improvement from the 10% drop in volume in the fourth quarter of 2009, and particularly solid given that the firm was cycling a spike in wholesale demand ahead of the federal tax increase last year. However, we think Marlboro’s market share (which increased 0.3 percentage points) was supported by the introduction of new line extensions. We expect Reynolds American RAI to soften its aggressive pricing promotions on Pall Mall over the next couple of quarters, and this should allow Marlboro to stabilize its value share.

New product launches, the discontinuation of brands and multipack promotions, and low wholesale inventory in the first quarter of 2009 all distort year-over-year comparisons of Altria’s smokeless unit. Despite adjusted volume growth of 5%, the underlying performance of the smokeless business was softer than the smokeless category, which grew 7%. Sequentially, however, the market share of Skoal and Copenhagen is stabilizing following Altria’s price cuts last year, and we expect Altria to focus on increasing share in one of the few growth categories in the tobacco industry.