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Altria's Focus on Smoke-Free Products Aids Amid Soft Cigarette Volumes

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Altria Group, Inc. (MO - Free Report) has been benefiting from its strategic shift toward smoke-free products in the face of declining traditional cigarette volumes. Pricing power has also been working well for the company, which has seen its shares rally 35.3% in the past six months. While this performance trails the broader industry growth of 36.7%, it surpasses the Zacks Consumer Staples sector and S&P 500 gains of 7.8% and 10.6%, respectively.

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Focus on Smoke-Free Alternatives Drives Altria

Altria is at the forefront of the transition to a smoke-free future, driven by its innovative product offerings. In the second quarter of 2024, the company's smoke-free portfolio, led by the NJOY e-vapor line, exhibited robust growth in both market share and volume. NJOY, in particular, has seen substantial increases in consumables and device shipments, indicating that Altria is well-positioned to capture the growing demand among adult smokers seeking alternatives to traditional tobacco products.

Altria has expanded NJOY's retail footprint, tripling its availability to more than 100,000 stores. Through strategic premium retail positioning and various trial-generating initiatives, NJOY has achieved significant market share growth. The introduction of new products like on! PLUS in international markets further demonstrates Altria's ability to innovate and capture market share in the rapidly expanding nicotine pouch segment.

The success of on! has also been a key driver in Altria's smoke-free portfolio, particularly in the U.S. market, where oral tobacco-derived nicotine (TDN) products are gaining traction as lower-risk alternatives. In the second quarter of 2024, the Oral Tobacco Products segment reported a 4.6% revenue increase to $711 million, with on! shipment volumes surging by 37% year over year.

MO’s Pricing Power

Altria’s robust pricing strategy has enabled the company to maintain profitability even as cigarette shipment volumes decline. While higher prices might lead to reduced consumption, the addictive nature of cigarettes often results in consumers absorbing these increases, ensuring continued revenue generation for the company.

Hurdles on Altria’s Path

While Altria is making strides in expanding into new areas like e-vapor and oral tobacco, cigarettes remain the company's primary revenue driver. The Smokeable Products segment continues to contribute the largest share of Altria's revenues, but this segment has been under significant pressure for some time.

The cigarette industry faced considerable challenges in the second quarter and the first half of the year, with shipment volumes declining amid persistent macroeconomic difficulties. This decline is largely due to ongoing economic pressures and the rapid rise of illegal disposable e-vapor products, which are capturing a growing share of the market.

Despite a recent stabilization in inflation, adult smokers are still feeling the economic pinch, with constrained discretionary spending impacting their purchasing behavior. The rapid growth of illicit e-vapor products, fueled by weak enforcement, has accelerated the shift from cigarettes to these illegal alternatives more than anticipated. As a result, Altria has experienced declining revenues in its Smokeable Products segment over the past few quarters, which has negatively impacted the company's overall top line.

In the second quarter of 2024, Altria’s Smokeable Products segment saw revenues drop by 5.6% to $5,495 million, accounting for 88.5% of the company's total revenues. Domestic cigarette shipment volumes plummeted by 13%, driven by the industry's overall decline, retail share losses and trade inventory movements. The industry's downturn was primarily caused by macroeconomic pressures on Adult Tobacco Consumers' (“ATC”) discretionary income and the increasing prevalence of illicit e-vapor products. The ongoing decline in cigarette volumes remains a significant concern for Altria.

Altria also faces considerable regulatory and legislative risks that could impact its operations and financial results. Potential regulatory actions, such as flavor bans or stricter marketing restrictions, could impede the growth of NJOY and other smoke-free products, further challenging the company's efforts to diversify its revenue streams.

MO’s Investment Guide

Altria's recent rally underscores the company's ability to adapt in a rapidly evolving market, with its push into smoke-free products yielding promising results. However, the decline in cigarette volumes and the looming regulatory risks present challenges. For existing shareholders, holding the stock could be wise, but potential investors may want to wait for more favorable conditions before jumping in. Altria currently carries a Zacks Rank #3 (Hold).

Solid Staple Stocks

Here, we have highlighted three better-ranked consumer staple stocks, namely The Chef's Warehouse (CHEF - Free Report) , Pilgrim’s Pride (PPC - Free Report) and Ollie's Bargain Outlet (OLLI - Free Report) .

The Chef’s Warehouse, which engages in the distribution of specialty food products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

CHEF has a trailing four-quarter earnings surprise of 33.7%, on average. The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal year sales and earnings indicates growth of 9.7% and 12.6%, respectively, from the year-ago reported numbers.

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, currently sports a Zacks Rank #1. PPC delivered a positive earnings surprise of 27.3% in the trailing four quarters, on average. 

The Zacks Consensus Estimated figure for Pilgrim’s Pride’s current financial-year earnings indicates growth of 183.43%, respectively, from the prior-year reported level.

Ollie's Bargain, the extreme-value retailer of brand-name merchandise, currently carries a Zacks Rank #2 (Buy). OLLI has a trailing four-quarter earnings surprise of 7.9%, on average. 

The Zacks Consensus Estimated figure for Ollie's Bargain’s current financial-year sales and earnings indicates a rise of around 8.1% and 12.71%, respectively, from the year-earlier levels.

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