Wells Fargo Likes Altria's Move To Counter Declining Cigarette Sales With Price Hikes

Wells Fargo likes Altria Group Inc MO’s willingness to use price increases to offset pressure from declining volume in cigarette sales.

The Analyst

Wells Fargo’s Bonnie Herzog reiterated an Outperform rating on Altria with a $65 price target.

The Thesis

The biggest question facing Altria and other cigarette makers is what to do about dropping sales as the culture shifts away from one where so many people smoked to one where far fewer people do. Also on the agenda for cigarette companies is what to do about the shift in traditional smokers to vaping.

Altria’s surprise announcement that it's increasing the cigarette list price by 6 cents a pack on most brands, including signature brand Marlboro, is good news for investors, Herzog wrote in a note after taking the temperature of more than 60 retailers.

While retailers were surprised by the increase, many believe it makes sense given margin pressure retailers face from state cigarette taxes, in addition to volume declines. Some retailers told Wells Fargo they anticipate a third, and maybe a fourth price increase this year.

Wells Fargo tends to agree, and because of the prospect of price increases raised full year EPS estimates for 2019 and 2020 by 2 cents to $4.22 and $5.05.

“We increasingly believe MO has multiple levers to pull to offset decelerating cigarette volumes and drive increased profitability including; strong pricing power, cost savings and JUUL service agreement payments,” Herzog wrote.

Altria bought into e-cigarette maker Juul late last year for $12.8 billion, giving it a 35% stake in the leading player in the business that is threatening traditional cigarette sales.

Herzog noted others in the industry followed MO with 6 cent price increases, including RJ Reynolds, Imperial Tobacco Group plc IMBBY and Liggett owner Vector Group Ltd VGR.