Altria Launching E-Cig Amid Softening Cigarette Demand

Altria Group Inc. (NYSE: MO), which reported softening first-quarter cigarettevolumes, will enter the e-cigarette market later this year, a move toaddress a pocket of the tobacco market that is gaining heightened attentionamong consumers. Profitability grew 16% for the quarter, aided by higher pricing forcigarettes and smokeless products, as well as a credit tied to a landmarktobacco settlement. But Altria's decision to enter the e-cigarettes business is notable as sometobacco executives this week suggested cigarette volumes were beingcannibalized by rising interest in e-cigarettes. Altria, which hadn't yetaddressed the category, said a subsidiary designed to develop new productswill introduce e-cigarettes in the second half of the year. Altria is trailing smaller peers Lorillard Inc. (NYSE: LO) and Reynolds AmericanInc. (NYSE: RAI), which have already began to address the relatively new market.E-cigarettes, which began to appear in the U.S. market in 2006, turn heatednicotine-laced liquid into a vapor mist, and come in several flavors. In the traditional cigarettes business, Altria has been gaining market sharethe past several quarters, in part driven by promotions that have loweredthe price for some of its products. The maker of Marlboro, L&M and othercigarettes expanded on those gains early in 2013, with total cigarettemarket share climbing to its highest level in four years. In the first quarter, Altria's total cigarette volume dropped 5.2%, hurt byone less shipping day though retail share gained. The overall category'svolume fell at estimated 6.2%. Marlboro's shipments were down 5.5% while discount brands grew 5.8%.Altria's overall cigarette market share grew to 50.5% from 50%, the fifthconsecutive year-over-year increase. Tobacco companies face a difficult operating environment as cigarettevolumes have been declining for years. A weak economy and high unemploymenthave continued to pressure consumers' disposable income. But the declines in overall cigarette volumes in the latest quarter was morebruising than historical trends, as consumers were stung by an increase inpayroll taxes, while also seeing higher gas prices at the pump. Overall, Altria reported a profit of $1.39 billion, or 69 cents a share, upfrom $1.2 billion, or 59 cents a share, a year earlier. Excluding items suchas a credit tied to a deal to recoup some payments made under the 1998Master Settlement Agreement, per-share earnings rose to 54 cents from 49cents. Revenue, excluding excise taxes, dropped 0.5% to $3.97 billion. Analysts surveyed by Thomson Reuters expected a profit of 53 cents onrevenue of $4.04 billion. Altria's smokeless products saw continued strength, with volume rising 3.4%as growth for Copenhagen offset declines for Skoal and other brands in theportfolio. The company spent about $57 million to repurchase 1.7 million shares duringthe quarter, completing a $1.5 billion buyback program. On Wednesday,Altria's board authorized a new $300 million repurchase program that thecompany expects to complete by the end of the year.