Altria Profits From Higher Prices Even as Smoking Rates Drop

Updated on
  • Company is raising prices and cutting costs to boost profit
  • Revenue falls short of expectations in latest quarter

For Altria Group Inc., more expensive cigarettes have proven key to maintaining growth as tobacco volumes decline.

The tobacco giant, which sells Marlboro products in the U.S., posted earnings that beat analysts’ estimates in the latest quarter -- even as smoking rates continue to fall. Price increases helped to balance declining sales volumes of combustible and noncombustible tobacco products in the period.

“Our financial performance continues to strengthen in the second half, as we expected,” Chief Executive Officer Marty Barrington said in a statement.

It’s not the first time Richmond, Virginia-based Altria has found success by boosting prices -- the strategy paid off in the second quarter, too. The company has previously announced it will cut $300 million in expenses by the end of the year. Factory closings will provide an additional $50 million in savings by 2018.

Earnings were 90 cents a share in the third quarter, excluding some items. Analysts estimated 87 cents, on average. Sales were $5.12 billion, excluding excise taxes, the company said Thursday. That fell short analysts’ projections.

Altria’s shares rose as much as 1.7 percent on Thursday. The stock had fallen 5.7 percent this year through Wednesday’s close.

‘Reduced Risk’

As smoking rates drop, Altria is working with its sister company Philip Morris International Inc. on “reduced-risk” products. These include the iQos, a gadget that heats a tobacco plug without setting it on fire. If these prove to be less harmful than cigarettes, they could be taxed at a lower rate and face fewer regulations.

That’s a big deal for the industry, which is facing rising pressure due to tax increases. In California, the most populous U.S. state, voters passed a proposition to increase cigarette taxes by $2 a pack, bringing the total levy to $2.87, last November. While the cost of a pack varies by state, they now cost close to $15 in New York.

Philip Morris has submitted two applications to the U.S. Food and Drug Administration that would let the iQos reach U.S. shelves with a “modified-risk” label. If the premarket tobacco product application is accepted, Altria could sell the product under a licensing agreement as soon as this year.

FDA Commissioner Scott Gottlieb may be more open to making major changes to the industry than previous officials. He announced in July that he wants to reduce the amount of nicotine in combustible cigarettes and ease the pathway for less harmful nicotine alternatives. If he gets his way, it would be one of the broadest attempts to stop smoking since 1965.

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