Herzog: Altria's E-Cig Strategy Shrewder Than First Predicted
Takeaways from Wells Fargo's meetings with company's president, CEO and CFO
BOSTON -- Earlier this week, Wells Fargo Securities LLC hosted investor meetings with the CEO, president and CFO of the Richmond, Va.-based Altria Group. Although Wells Fargo's managing director, beverage, tobacco and convenience store research Bonnie Herzog had previously described Altria's MarkTen entry into the electronic cigarette as a "me too" product, she came away from the meeting "enthusiastic about Altria's near- and long-term prospects"--especially when it came to MarkTen.
"Altria's entry into e-cigs may be more shrewd and strategic than we originally thought," Herzog said in a research note on the meetings. "We continue to remain very bullish on the e-cig category and now believe Altria's methodical entry with MarkTen could present a greater opportunity for the company than we originally believed."
Part of Herzog's enthusiasm stems from the insistence of Altria's management that the company is not merely "dabbling in e-cigs, but has entered the category to establish market leadership."
Herzog went on to say that "despite the perception Altria's MarkTen is somewhat of a 'me too' product and that Altria was late to the e-cig party, we are now more confident Altria has the ability to leverage its war chest of cash, its sizeable infrastructure, its deep understanding of the tobacco consumer, and its entrenched position at retail."
Still, with Altria solidly positioned as the leading tobacco manufacturer in the United States, Herzog acknowledges that Phillip Morris' parent company has more at risk than companies like Lorillard and Reynolds.
"However, we increasingly believe that Altria's strategy to enter more slowly could prove to be quite shrewd," she said, "as it rides on the coattails of Lorillard and others as they spend millions of dollars to develop the category."
It's product innovations in the form of MarkTen and last year's Marlboro NXT--which was taken national in July--that Herzog describes as the "cornerstone" of Altria's growth strategy.
"We solicited feedback from our vast database of retailer contacts to hear their thoughts on Marlboro NXT," said Herzog. "Overall, feedback was positive, and we expect Marlboro NXT to generate incremental share gains in Q3. This is consistent with management's comments that the NXT expanded rollout has met their expectations and a full pipeline of innovation will help the company continue to achieve its goal of moderately growing share profitably."
Retailers surveyed by Wells Fargo noted that while NXT is certainly taking some shares away from Reynolds' Camel Crush capsule offering, it's also taking shares from Marlboro Gold Box King. With NXT now available nationwide, Philip Morris is attempting to generate further trials with a 50-cents-off coupon. Herzog also reported that Altria may be close to rolling out another line extension, Marlboro Edge.
All of this has Wells Fargo enthusiastic about Altria's future.
"Bottom line, we continue to believe Altria has entered a period of sustainable growth and improving margins over the next few years," Herzog said.