Thursday, April 27, 2023

Altria Reports 2023 First-Quarter Results ($MO)

We gave up on Altria and the big tobacco trade just last month (1, 2) and already the Q1 2023 reports for big tobacco are coming in. So, how are they doing? 

Philip Morris reported last week, with rather discouraging news that they are going to try to sell IQOS in the U.S. instead of getting a good vape product (like Juul) launched. The stock seems expensive compared with high yield debt, or a pipeline closed end fund. The E.U. is proposing higher cigarette and vaping taxes, and the Netherlands are banning nicotine pouches.

Altria reported earnings this morning. Some highlights:

  • Smokeable products segment reported domestic cigarette shipment volume decreased 11.4%, primarily driven by the industry’s decline rate, retail share losses (both of which were impacted by macroeconomic pressures on ATC disposable income) and trade inventory movements, partially offset by calendar differences.
  • Cigarette revenues decreased 3.3%, primarily driven by lower shipment volume and higher promotional investments, partially offset by higher pricing. Revenues net of excise taxes decreased 1.4%. Reported operating companies income (OCI) for the segment decreased 2.2%. 

This is not what you want to see as an Altria investor. Cigarette volumes are still plummeting, and they aren't increasing the price of the pack enough to compensate and keep revenue flat, with the result that cigarette earnings are falling.

Management blames gas prices and inflation. However, as we pointed out, when oil prices spiked last summer, it hurt cigarette sales, but when oil prices declined through the end of last year, cigarette sales did not recover or bounce.

We think that high gas prices were a catalyst for some smokers to switch to a reduced risk nicotine product and quit cigarettes, which would explain the lack of a bounce after gas prices fell. If that is true, there is a negative asymmetry in the cigarette business; a one-way ratchet where bad circumstances push smokers away from cigarettes and nothing brings them back. 

Management has lots of excuses on the conference call for the volume decline:

I think when you think about the consumer, we tried to highlight in our remarks where you’re seeing the cumulative impact of high inflation across all of their spending categories. So it’s not just high inflation in the quarter, it’s the cumulative impact of that through time. I think certainly, you’re seeing interest rates climb, which is impacting consumers, mortgages, credit cards, car loans. And underneath all that, to respond to the consumer, we are seeing accelerated debt as well as decline of savings rates. So they’re using what they have available to them. But it’s the cumulative impact of that. It’s not new to the cigarette space. I think you can go back in history a bit, and we see other instances where the consumer came under extreme pressure.

We think it's simpler than this. Ask yourself why the macro environment is so bad for cigarette sales, yet McDonald's had a great quarter (U.S. comp sales up 13%), Chipotle had a great quarter (comp sales up 11% with margins also up), PepsiCo had a great quarter, and Valero had a great quarter (with demand for gasoline and diesel at record highs).

The difference is that cigarettes have better, cheaper competition. There are the "open tank" vapes which the user refills with his own nicotine-containing liquids ("juice"), which we think appeal to the downscale ex-smokers, as well as the pothead users who have experience using them with THC liquids.

For the younger crowd (which probably has never-smokers), you have closed tank products like Juul or the Elf Bar, which are illicit but selling like hotcakes:

Juul has been in trouble since late 2019, when US regulators told it to stop marketing to kids with flavoured pods. The company then pre-empted a pseudo-ban (which would’ve been difficult to enforce) by discontinuing everything but tobacco and menthol-flavoured rechargeable, cartridge-based e-cigarettes, or pod systems. But for reasons complicated and unclear, this and subsequent FDA rulings has not stopped the sale of other, disposable e-cigarettes, some of which switched to using synthetic nicotine in an effort to exploit a regulatory loophole that the FDA is beginning to close. Brands like Elf Bar and Puff Bar are therefore still selling flavours like “blue razz lemonade”, “coconut melon” and “kiwi passion fruit guava”. “These products aren’t legally on the market,” said one investor in tobacco products with a dim view of the FDA, “but that’s not quite the same as them being illegal”.

The biggest thing that tobacco longs are missing is that competitive intensity in nicotine delivery has gone from sleepy (the cozy Marlboro and Camel duopoly) to ferocious.

That is going to make it very difficult for big tobacco to keep raising the price of the pack of cigarettes enough to offset the volume declines. It is also likely to shrink the overall nicotine delivery profit pool (which is more of a function of industry structure than market size) and divide whatever profit pool does exist among more players.

Bearish. We think the time to get out of this industry is when you see the competitive intensity increasing. By the time it is obvious in the quarterly numbers, it may be too late to sell at a good price.


CP said...

Wyndham Hotels and Resorts:
By all accounts, it was a great start to 2023. With U.S. unemployment at its lowest level since the 1960s and consumer savings of $1.6 trillion, our guests, who are primarily middle class with household incomes of over $90,000, nearly 30% above the U.S. median, are allocating a higher share of their wallets to travel this year. This surge in travel spending has been unabated by the economic headlines throughout the year and reflects their strong desire to reconnect with family and friends, explore new destinations and create lasting memories. U.S. RevPAR growth for our economy brands was in line with fourth quarter performance, a reflection of the cadence of growth for this segment, which had fully recovered by the second quarter of 2021. Meanwhile, our mid-scale and upscale portfolios benefited from continued recovery in occupancy while still driving rate gains.

Anonymous said...

It was all over for Altria when hey sold the Marlboro Ranch, Altria was telling you they were throwing in the towel.

CP said...


Anonymous said...

nice that you've belatedly admitted you were wrong about tobacco. now try oil, inflation, etc... or alternatively, you can just wait 6 months and the market will do it for you.

Anonymous said...

Yeah Altria has been duped by the Feds, the Feds are out to destroy Altira, so wining and dining lobbyists is no longer in the MO business plan.

Anonymous said...

Towel status: thrown.

League of Women Voters said...


"Altira". All tired from throwing them towels.

Anonymous said...

always amusing when you refuse to publish one of my comments, thereby proving once again what a thin-skinned chump you are. even more amusing to see you retweet people like conor sen who make the dumbest bull arguments imaginable. after years of being a stubborn permabear crank you've suddenly become a growth cheerleader, right when the economy is facing serious problems. lol.

enjoy being long and wrong.

CP said...

The letters also highlight tobacco companies’ growing frustration with the FDA’s scattershot enforcement approach toward flavored vapes. While all of these products are currently illegal, the FDA has only issued warning letters to a smattering of manufacturers. One of Reynolds’ letters, for example, notes that the shop is selling Elf Bars, an increasingly popular disposable vape, which the FDA has not taken any enforcement action against to date.

Anonymous said...

If you think customs violations are complicated now, just wait till the Fighting Trade Cheats Act passes into law. This bill seeks to dramatically increase penalties for fraud and gross negligence and create a new pathway for civil lawsuits against customs violators. Yes, a private right of action to be sued for customs violations!

CP said...

Australia will effectively ban recreational vaping, putting in place stricter regulations on e-cigarettes than the U.S. and many other countries over concerns that they are contributing to increases in smoking among young people.