Altria

Altria's second-quarter adjusted diluted EPS grew 2.8% to $1.48, driven by 2.4% adjusted operating income growth in smokeable products while oral tobacco fell 8%. Premium cigarette volume decline continued to decelerate, with Marlboro down 7.4% compared with 7.8% in the first quarter.

Why it matters: While we were encouraged to see the slower declines in premium, the discount category continues to take share in the US combustibles market. Given Altria's heavy reliance on premium with Marlboro and scant reduced-risk contributions, we see risk of further pressure to come. The increased enforcement of illicit flavored vapes appears to be helping drive the deceleration of volume declines. However, the challenging consumer environment is forcing smokers to switch from premium to discount. Until the situation stabilizes, switching is likely to continue, hurting Altria. This headwind is magnified by disappointing performance in nicotine pouches, as On! volumes fell 4% in the second quarter. While some of this is attributable to inventory timing, we still think it's falling behind market leader Zyn (Philip Morris) and fast-growing Velo (British American Tobacco).

The bottom line: We expect to decrease our $72 fair value estimate for wide-moat Altria by a low-single-digit percentage. The decrease should stem from extended pressure on Marlboro as well as a reduced outlook for On!, partially offset by growth from Basic. We think shares are fairly valued. For tobacco exposure, we think wide-moat Imperial Brands (fair value of GBX 3,300) looks undervalued, as the market appears concerned about recent volume-share losses and overlooks growing profitability.

Key stats: Oral tobacco adjusted operating margin fell 2 percentage points to 66.7%, driven by higher investment to support the On! Plus launch. As of now, it does not appear that those investments are driving higher growth, which is concerning as competition in pouches is only intensifying.

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After reviewing second-quarter results, we've lowered our fair value estimate to $71 per share from $72. The decrease stems from extended pressure on Marlboro as well as a reduced outlook for On!, partially offset by growth from Basic.

Altria's second-quarter adjusted diluted EPS grew 2.8% to $1.48, driven by 2.4% adjusted operating income growth in smokeable products while oral tobacco fell 8%. Premium cigarette volume decline continued to decelerate, with Marlboro down 7.4% compared with 7.8% in the first quarter. While we were encouraged to see the slower declines in premium, the discount category continues to take share in the US combustibles market. Given Altria's heavy reliance on premium with Marlboro and scant reduced-risk contributions, we see risk of further pressure to come.

Our valuation implies a 2027 price/adjusted earnings ratio of 12.5 times, enterprise value/adjusted EBITDA of 9.5 times, and 5.9% dividend yield. These multiples are near the middle of the tobacco peer group, given Altria’s pure-play US exposure and nascent position in next-generation products. Although the US is an attractive market, we think volume headwinds are more material than in peers' international markets and thus weigh on long-term growth.

For smokeable products, comprising nearly 90% of operating income excluding corporate expenses, losses from the e-vapor and all other segments, and the amortization of intangibles (defined by the company as OCI), our forecast is predicated on the assumption of the continued secular decline in cigarette volume. We assume volume declines average 4% over the next five years, with increased cigarette exports as part of the partnership with KT&G partially offsetting secular domestic volume decline. We also think that increasing enforcement will stem volumes lost to illicit flavored vapes, and the consumer wallet will benefit from stabilizing inflation. Amid more than 3% price increases, we forecast net revenue for smokeable products to decline about 20 basis points per year over the next five years.

For oral tobacco products, constituting most of the remaining OCI, we forecast five-year revenue growth of more than 2% per year, mostly from price increases. We expect volume to be decline about 2% per year as growth from Altria's On nicotine pouches partially offsets the declines for its Copenhagen and Skoal brands in traditional oral tobacco.

Management said it has redesigned around all four of the disputed patents with Juul, although it needs FDA approval before it can sell its Njoy vapes in the US again. We forecast vaping revenue from Njoy to reach about $400 million by 2030 with a 40% OCI margin, well below the 60% margins in Altria’s other segments as the business will be much smaller.

Companywide, we forecast top-line growth of about 1% per year over the next five years. Our model assumes Altria’s adjusted OCI margin in the mid-60s, meeting its 2028 enterprise goals, as higher combustibles prices, growth from On, and cost savings offset slight operational deleverage from declining combustibles volume. We also think it will miss its target of mid-single-digit annual adjusted EPS growth, averaging flat growth over the next five years.

Beyond our five-year explicit forecast, we assume a terminal EBITDA multiple of 8.8 times to value future cash flows, based on medium-term EBI growth of around 1% and a long-term decline of 2.5%. We refrain from using Morningstar’s standard methodology, given the long-term secular decline of tobacco. Our multiple is near the average of our tobacco coverage, reflecting Altria’s relatively middling position in next-generation products.

We explicitly include one ESG risk in our forecast, as we expect the adverse health effects of tobacco and nicotine to lead to long-term consumption decline.

We assign Altria a wide Morningstar Economic Moat Rating based on intangible assets. We forecast returns on invested capital including goodwill to improve to upper-30s, far exceeding the company’s cost of capital. Even if cigarette volume declines faster than the 4% annual pullback that we forecast, we see ample room for the company to continue to generate excess returns.

Tobacco contains nicotine, an addictive substance that keeps customers coming back and suppresses the cessation rate despite adverse health effects from consumption. According to data from the Tobacco Atlas, more than 60% of all smokers intend to quit, and 42% have attempted to quit over the past 12 months. Yet in most markets, the smoking rate is only in a very modest decline, implying that the majority of smokers attempting to quit fail to do so. Academic research (Lewis and others, 2015) has shown that while cessation rates are not correlated with consumer brand loyalty, premium price segments are associated at a statistically significant level with lower cessation rates. With around 90% of cigarette volume from premium categories (primarily Marlboro), Altria has more exposure to premium segments than its competitors.

Moreover, consumers exhibit brand loyalty. One academic study (Nogueira and others, 2018) found that 86.6% of smokers had a preferred brand, with 44.4% saying they had a “lot of” loyalty to their brand. Far more stated taste (83.2%) rather than price (51.7%) as driving their preference. This is even though blind taste tests have observed that most smokers cannot distinguish brands (DeCicca and others, 2021). The addictiveness and strong brand loyalty lead to robust pricing power. Over the past 10 years, even as Altria’s volume declined 7% annually, we estimate its prices increased roughly 6% per year.

We believe that regulations have virtually entrenched market leaders like Altria. In the US, the Food and Drug Administration has imposed restrictions on marketing new or modified products that essentially keep new entrants out of the market. Tobacco products introduced or modified after March 22, 2011 (for some small tobacco categories, the date is Aug. 8, 2016) require premarket review by the FDA unless the manufacturer can prove that the products are “substantially equivalent” to products commercially available on Feb. 15, 2007. Products or modifications deemed not to be substantially equivalent may only be brought to market in the US following an FDA review and approval process. The substantial equivalence rule makes it extremely difficult for entrants to launch new products. Additionally, it reduces the financial burden of investing in a fast-moving pipeline of new products that is a critical component of the business model for other consumer industries.

Even if new entrants were to receive FDA approval for a new product, other regulations make it difficult to build market share. Tobacco advertising is severely restricted in the US, with bans on most forms of mass marketing. This makes it tough for hypothetical new entrants to gain the attention of smokers and damps competition among incumbent manufacturers. This has resulted in volume shares at the manufacturer level that have been very stable for decades, primarily, we believe, because the lack of marketing communication has discouraged brand switching. It is also significant that participating manufacturers are due a rebate on a proportionate share of their master settlement agreement payments should their market shares fall below a threshold based on 1997 share levels. In other words, losing share would lead to lower MSA payments, a potential offsetting benefit for a company like Altria.

Given Altria’s singular US market exposure, we do not believe it has a cost advantage over larger global peers, including Philip Morris International, British American Tobacco, and Japan Tobacco. We believe that procuring tobacco leaf on a global basis and on a larger scale begets lower costs for these companies. Altria’s 2025 smokeable volume of 64 billion sticks is less than half Imperial’s volume of 187 billion for the year ended September 2025 and only a fraction of the volume of PMI in 2025 (607 billion sticks, excluding HeatSticks), British American Tobacco (477 billion), and Japan Tobacco (564 billion). We estimate Altria's operating cost per pack of cigarettes is $0.88, compared with $0.49 for Philip Morris, $0.47 for British American Tobacco, $0.49 for Japan Tobacco, and $0.59 for Imperial Brands.

Despite secular volume decline of cigarettes, we remain confident that Altria’s competitive advantage can last for the next 20 years. Its pricing power has allowed it to offset the volume decline. We expect there is a tipping point at which price elasticity would increase. For example, in Australia, since 2011, tax increases doubled the retail price of cigarettes in just six years, which in turn led to the smoking rate falling from 16% to 13%. A pack of 20 cigarettes (equivalent; a standard pack contains 25 sticks in Australia) now costs approximately $40, according to a survey by Tobacco in Australia, well above the roughly $21 average retail price in the UK, $10 in the US, and roughly $4 on average globally, according to the World Health Organization. Assuming Australia is applicable to other markets and 4% real pricing increase, it will be into the 2060s before global pricing reaches levels at which price elasticity increased in Australia.

The threat of material value destruction is low probability, in our view. For example, in 2022, New Zealand passed a law that effectively banned anyone born in 2009 or later from purchasing cigarettes for life, reduced nicotine content by 95%, and reduced the number of tobacco retailers by 90%. A new government repealed the ban in 2024, arguing that prohibition would lead to the rise of an illicit market. We believe future regulation is likely to be incremental rather than bans.

The US market, while mature in volume terms, is a highly affordable one relative to other developed markets. This leaves headroom for price increases for many years.

Altria’s dominant market share in US cigarettes and oral tobacco has created a distribution system that few competitors can match for launching next-generation production.

The business generates massive free cash flow margins that allow for significant return of capital to shareholders as well as insulating the potential damage from M&A missteps.

As a US pure play, Altria lacks exposure to some of the emerging markets where total tobacco consumption is increasing, leaving it subject to the annual rate of domestic secular decline that is well above the global average.

The FDA appears to have taken a more aggressive approach to cigarette regulation in recent years. It has previously explored banning the use of menthol and lowering nicotine in cigarettes.

With cigarette volume in secular decline, multiple nicotine alternatives are emerging, limiting the scale and profitability potential of each emerging category.