Altria released impressive second quarter results, demonstrating its strong execution.
The company reported adjusted diluted Q2 earnings per share (EPS) of 74 cents (up 13.8%), primarily driven by strong cigarette volume growth of +1% and solid pricing of 4.6%, Wells Fargo reported.
“We estimate combustible cigarettes net price realization was 5% in Q2,” said Bonnie Herzog, a senior analyst with Wells Fargo. “Importantly, Altria’s adjusted operating company income (OCI) increased an impressive 14.2% with strong margin expansion of 311 base points (bps) to 47.3%. We continue to believe Altria remains on solid footing to deliver strong, consistent results given the momentum it has in combustible cigs and disciplined cost management. As such, we believe there is virtually no downside risk to Altria’s fiscal 2015 earnings with the potential for upside.”
Herzog further predicted Altria’s “best in class execution” will allow it to generate accelerated growth over the long term. “We continue to remain impressed by the momentum behind Marlboro which we expect to continue given Altria’s refined strategy and brand architecture,” she said.
Herzog also pointed to Marlboro’s record retail share of 44.2% as a sign that Altria’s investments behind its new brand architecture are resonating with the stronger tobacco consumer. “We expect Marlboro’s strength to continue given its expanded reach and full innovation pipeline….We remain impressed by Altria’s investments in Marlboro and its ability to strike a healthy balance between net price realization and share gains. We expect continued profitable share gains for Marlboro in 2015.”
Reynolds American Inc.
Reynolds American Inc. (RAI)’s portfolio for the second quarter had earnings per share of $1.02, up 14.6%, which were driven by the strength of its overall portfolio, including Newport, as well as strong net pricing and lower costs. Cigarette pricing was up 6%, while smokeless pricing was up 9%.
“We continue to expect RAI’s momentum to accelerate and believe RAI is really just getting started, with more upside potential around the corner, as it begins to unlock future growth potential for Newport,” Herzog said. “We continue to believe RAI’s position in the overall tobacco industry is stronger than ever and the addition of Newport will catapult its growth, driving double-digit EPS for the next several years.”
With Newport as a key driver of RAI’s future growth potential, Wells Fargo predicted:
(1) RJR’s cigarette shipment share should increase by 200bps to 32.8% by 2017;
(2) Newport’s shipment share gains should accelerate to 14.7% by 2017, over 100 bps higher than if there were no deal;
(3) Camel and Pall Mall should benefit from a post-deal “halo effect” driven by better shelf space and synergies, taking slight incremental share;
(4) RJR’s controllable cigarette costs/pack should decrease to 60-cents/pack by 2017, driving incremental margin expansion of 410 bps to 49.1%;
(5) Cost savings/synergies of around $850-900 million should drive double-digit earnings accretion in the mid-teens by 2017; and
(6) Minimal cultural/integration risk given RAI essentially “only” acquired the Newport brand while the bulk of Lorillard’s other assets are being divested to Imperial.