Altria, A Smoke Signal of Distress or Success? (MO)

Altria (MO)

The smoking industry has faced a litany of challenges over the past two decades. The industry has seen everything from public smoking bans to cigarette taxes. These obstacles have certainly hit the tobacco companies hard, but the industry has yet to be knocked out. While some tobacco firms went down for the count, there were companies such as Altria (MO: Charts, News, Offers) that refused to throw in the towel. In fact, Altria has even managed to throw a few punches of its own. The largest U.S. tobacco company reported that its third quarter profit grew 1.7 percent while revenue increased 20 percent. How was Altria able to beat Wall Street predictions for the quarter?

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The recent economic downturn has impacted almost every type of company, some more than others. Despite being considered by many as “recession proof”, the tobacco industry has certainly been affected by the economic climate. Altria quickly realized that strategic adjustments were necessary, and began initiating extensive cost cutting programs. Altria’s cost cutting efforts helped boost profit margins, and position itself for future success. However, Altria needed to do more than just save some pennies.

The largest U.S. tobacco company recognized that cigarette sales are on the decline and have been the target of several government taxes, including a recent 62 cent tax increase on April 1st. As a result, Altria made a key product offering adjustment. It decided to diversify its product line further and acquire smokeless tobacco manufacturer UST. Altria’s smokeless tobacco products were pivotal in offsetting cigarettes’ declining performance. The smokeless tobacco acquisition helped bolster and solidify its revenue stream. The Richmond-based tobacco manufacturer also saw strong profit margins from its cigars due to recent price increases. The combination of Altria’s cigars and smokeless tobacco offerings were key contributors towards its profit increase.

Altria made some very wise decisions during the third quarter. The largest U.S. tobacco company focused on streamlining costs and curbing excess spending. Altria also broaden its product focus from cigarettes to stronger performing markets like smokeless tobacco and cigars. The UST acquisition seems to be paying off already, and its cigar unit has been showing great promise. However, the steady decline of cigarettes is very alarming for Altria. The recent federal tax increase has significantly hurt cigarette sales. Despite Altria’s optimistic outlook, the future of cigarettes is very uncertain. However, Altria is hoping to smoke out the federal cigarette taxes and continue to build off its recent success.

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