NEW YORK -- Wells Fargo recently hosted investor meetings with executives of Richmond, Va.-based Altria Group Inc. Conversations with CEO Marty Barrington and CFO Billy Gifford left Wells Fargo senior tobacco analyst Bonnie Herzog optimistic about the company’s opportunities.
“Overall management’s tone was positive and upbeat and we came away incrementally more bullish on Altria’s ability to drive accelerated earnings growth over the next few years,” Herzog wrote in a research note. “We believe Altria is strongly positioned to deliver superior growth in 2016 and beyond.”
In terms of the “beyond,” Herzog had three predictions based off the management meetings:
1. Marlboro will continue its momentum: Altria’s leading Marlboro brand has performed very well, especially as the outlook for the tobacco consumer improves thanks to lower unemployment rates, higher housing starts, stronger consumer confidence and lower retail gas prices.
“Altria has clearly benefited from the stronger tobacco consumer as Marlboro’s retail share has reached an impressive 44%, up over 2% in the past five years,” Herzog said. “We expect the brand to continue to take incremental share of 0.1% to 0.2% each year as Altria continues to strike a healthy balance between incremental share gains and margin expansion.”
Herzog described Marlboro as Altria’s “most valuable asset,” predicting the powerful branding could allow the company to succeed in other segments, such as menthol.
2. A superpremium Marlboro?: Herzog noted the natural, organic, superpremium segment has been growing rapidly, with Winston-Salem, N.C.-based Reynolds American Inc.’s Natural American Spirit brand growing by more than 20% annually and accounting for 2% of all cigarette sales. Although Altria is currently underindexed in the superpremium segment, Herzog believes there’s an opportunity.
“We wouldn’t be surprised if Altria decides to enter this segment either organically or via an acquisition,” she said. “We believe there is an opportunity to further leverage the Marlboro brand, possibly launching a line extension such as Marlboro 2.0.”
3. Digital will deliver: Besides the strength of the Marlboro brand, Herzog pointed to Altria’s digital strategy. Because of regulations, tobacco manufacturers have had to market and communicate with consumers differently than most CPG companies.
“Since the 1990s, Altria has been engaging with adult smokers on a one-to-one basis on a broad scale and built a database of age-verified smokers 21 and older,” Herzog said. “We continue to be impressed with Altria’s digital innovation and capabilities and believe this gives the company a competitive advantage.”
More recently, Altria has leveraged this database to develop its new Marlboro app with mobile coupons accepted by nearly 100,000 retailers.
“This has been a very smart and efficient way for Altria to communicate with its consumers, which will help to drive faster growth and further margin expansion for the company,” said Herzog. “Also, this digital platform further aligns Altria with retailers since the mobile coupons ultimately drive increased traffic and possible add-on purchases for retailers.”
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