Altria Has To Contend With The Impact Of Ozempic (NYSE:MO)

In our last coverage of Altria Group Inc. (NYSE:MO), we told you to enjoy the dividends as price appreciation would be MIA for this melting ice cube. That thought also led to our buy under price which was a bit away from the market.

We rate the stock a hold and see it as an oil royalty kind of play with terminal value of zero. As such, we need to assess whether the expected value of the dividends we would get over time would exceed the current price. That leads to our “buy under” of about $35 and that is the most we would pay for this.

Source: NJOY The Dividends As You Won’t Get Price Appreciation

The stock has declined since then with a modestly negative total return.

We go through the Q2-2023 results and tell you which are the key items you need to pay attention to.

Altria Q2 2023 Earnings Results

The headline revenue number was on target and the non-GAAP EPS beat by a cent. Revenues net of excise taxes were up a smidge at $5.438 billion.

Looking at a more detailed view of the numbers, we see that gross profit was up nicely, 2.5% year over year.

This is an impressive performance coming in at the tail end of a strong inflationary burst. Altria has been able to maintain its strong gross margins through a lot of pricing increases. One other number though that stood out was the general corporate expense area, which we have highlighted above. That figure was up nearly 7-fold year over year.

Marketing, administration and research costs increased $374 million (35.6%), due primarily to higher general corporate expenses, which included agreements in 2023 to resolve certain JUUL-related litigation and shareholder derivative lawsuits as discussed in Note 13, and acquisition-related costs associated with the NJOY Transaction.

Source: Altria Q2-2023 10-Q.

Investors must have winced at the comment on JUUL, the gift that keeps on giving.

We are a party to lawsuits initiated by the attorneys general of Alaska, Hawaii and New Mexico relating to our former investment in JUUL. In April 2023, we agreed to settle a lawsuit initiated by the attorney general of Minnesota.

Source: Altria Q2-2023 10-Q.

A total of $240 million will be paid for this.

Of course, this is all scrubbed and cleaned out of the non-GAAP number, so you won’t find it unless you look at the actually GAAP-compliant income statement.

While the JUUL-related sinkhole was not particularly appetizing, the company did deliver one piece of relatively good news. That was on the volume decline front. Of course, if you looked at total cigarette volumes on a year-on-year basis, you saw the familiar decline, which in this quarter was 8.7%. But this quarter’s decline was less than the decline we saw for the 6-month comparative figure.

In other words, this was a rare situation where Altria’s “sticks” increased quarter over quarter. You can see the 20.561 million number above and compare it to the 18.269 million below.

What’s going on here? Is the ice cube not melting anymore? The company certainly did not change its strategy of passing on price increases. You can see the delta below vs. Q2-2022. One could argue that Altria was more generous at the low end of the price spectrum and the lowest effective price only moved up about 1.5%.

But the key here was the change in wholesale inventory estimates. Wholesale inventories as assessed by Phillip Morris USA, were from 2.1 billion to 2.4 billion units. So when you adjust for this, the declines do become steeper.

Smokeable products segment reported domestic cigarette shipment volume decreased 8.7%, primarily driven by the industry’s decline rate and retail share losses (both of which were impacted by macroeconomic pressures on ATC disposable income), partially offset by trade inventory movements. When adjusted for trade inventory movements, smokeable products segment domestic cigarette shipment volume decreased by an estimated 10%.

Source: Altria Q2-2023 Results.

So this appears to be a temporary reprieve to Altria’s sales figures. As we have stated before, we expect inventories at the wholesale levels to decline markedly over time to maintain a similar sales-to-inventory ratio. This will compound issues for Altria’s sales figures in our view.

Outlook

Whether you invest in Altria or not, comes down to this slide below.

Altria is breaking down the cigarette industry decline rates into 4 components and blaming almost half of it on the current macroeconomic factors. If true, then well, we can expect declines to stall out and Altria won’t have to keep raising prices so rapidly. That in turn will impact the “cigarette price elasticity” factor and keep Altria chugging along for a lot longer.

On the other hand if you believe that there is a secular shift in smoking that accentuates declines as fewer and fewer people find smoking “cool”, you are in our camp. We expect a constant loss of stick volumes per year from quitters and the smokers who get sent to Valhalla. This is a constant loss in numbers and progressively represents a bigger percentage loss in the years to come. We believe Altria’s price countermeasures will make this decline worse and a downward spiral is a matter of time.

A final piece of this equation is a new and unlikely ally in the battle to quit.

Ozempic use (and abuse) has been on a tear in the US, and it is bringing up some unexpected results.

A self-described “heavy drinker,” Michael McCluskey had struggled with obesity for years. But after he was prescribed Ozempic for potential prediabetes linked to his weight two years ago, he shed 120 pounds – and the urge to regularly consume alcohol.

The 59-year-old who resides in Nova Scotia, Canada, realized his heavy drinking habits had shifted after he read reports from other Ozempic takers. “It just sort of clicked off,” he said.

McCluskey said he would typically have four-to-five drinks a day but after starting Ozempic, he only drinks a handful of times a year. Looking back, he feels the shift kicked in about six months on the drug.

Source: Wall Street Journal (emphasis ours).

So a lot of the impact from Ozempic on smoking might lie ahead of us. A new trial is on its way to see if a measurable impact can be demonstrated for smoking.

Recent preclinical evidence indicates that glucagon-type peptide-1, an incretin hormone, impacts both alcohol and nicotine motivation and intake. This project will utilize human laboratory screening procedures to evaluate a GLP-1 receptor agonist as a novel candidate therapy for smokers with AUD. Participants who meet criteria for AUD and report smoking will complete laboratory alcohol administration procedures while receiving medication or a placebo. This study will provide initial human data on the effects of a GLP-1 receptor agonist in relation to alcohol-related outcomes, including both alcohol and nicotine motivation,

Source: Clinical Trials.gov

While we would not hang our hats on Ozempic single-handedly wiping out smoking, we have seen enough data to believe that it is likely going to play an additional role to the secular forces reducing smoking. There are a multitude of other GLP-1 agonists in development and the likelihood of at least one adding to Altria’s woes cannot be ruled out.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.