Altria Posts In-Line Q2 Earnings, Revs; Narrows Outlook

Altria Inc.'s MO adjusted earnings of 65 cents per share in the second quarter of 2014 were in line with the Zacks Consensus Estimate. The results, however, exceeded the prior-year quarter's results by 4.8%, backed by strong performance of the core tobacco business and leading premium brands.

Revenues and Margins

Revenues, net of excise taxes, increased 1.0% year over year to $4.6 billion for the quarter due to revenue gains in the smokeless segment. Revenues were in line with the Zacks Consensus Estimate.

In the quarter, gross profit increased 1.9% to $2.6 billion compared with the prior-year quarter due to higher cost of sales. Operating income slipped 1.3% year over year to $1.9 billion due to higher profit and higher marketing, administration and research cost.

Segment Details

Smokeable Products Segment: Revenues inched up 0.8% to $3.96 billion as higher pricing was offset by lower shipment volume.

Shipment volume in the quarter declined 5.0% to 32.5 billion units compared with the prior-year quarter, primarily due to overall decline in the industry.

Leading brands like Marlboro and L&M reported market share gain during the quarter. However, Black & Mild reported a decline in market share during the quarter.

Adjusted operating income increased 3.6% year over year to $1.8 billion, reflecting higher pricing. Operating income margins inflated 1.2 percentage points (pp) to 44.2% during the quarter.

Smokeless Products: Revenues increased 0.7% to $428 million backed by higher shipment volume.

Smokeless products' shipment volume increased 1.6% to 203.8 million units mainly due to higher year-over-year volume of Copenhagen and Skoal brands.

Although Copenhagen brand gained 1.5 pp retail share during the quarter, Skoal witnessed a 1.1 pp decline in retail share primarily due to competitive activity.

Furthermore, adjusted operating companies' income increased 5.6% year over year to $285 million backed by improved volume and pricing. Operating companies' income margins gained 3.1 pp to 66.6%.

Wine: The segment's revenues went up 6.8% year over year to $141 million mainly due to higher pricing and improved shipments. Wine shipment volume increased 1.9% to $1.9 million units, due to higher distribution of the 14 Hands brand.

Adjusted operating companies' income went up 12.0% to $28 million on the back of positive pricing. Operating income margins shrank 1.0 pp to 19.9%.

Other Financial Details

During the second quarter of fiscal 2014, Altria repurchased approximately 3.3 million shares for approximately $132 million.

Altria's subsidiary Nu Mark LLC (Nu Mark) began its national expansion of MarkTen e-vapor products. MarkTen achieved distribution in over 60,000 retail stores in the Western half of the U.S.

Outlook

Altria tightened its 2014 earnings guidance. The company expects earnings in the range of $2.54 to $2.59 as against earlier expectations of $2.52 to $2.59. The guidance reflects an increase of 6% to 9% from $2.38 in 2013.

Altria expects 2014 earnings to benefit from lower interest expense, lower effective tax rate and lower share count due to the current share buyback program.

Altria carries a Zacks Rank #4 (Sell). A better-ranked stock in the tobacco sector include Reynolds American Inc. RAI carrying a Zacks Rank #2 (Buy). Other stocks performing well in the consumer staples sector includes PepsiCo Inc. PEP and White ave Foods Inc. WWAV both carrying a Zacks Rank #2.

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