Altria prices offset cigarette volume declines

Altria Group demonstrated the pricing power tobacco makers possess as interest in cigarettes dropped off further, and said Thursday that its buyout of smokeless tobacco maker UST positions it for long-term growth amid the widespread financial turmoil.

The maker of Marlboro, Parliament and Virginia Slims said its third-quarter profit fell 67 percent from a year ago, when results included its overseas operations. But earnings from continuing operations rose 15 percent and the company confirmed its full-year profit forecast. That comes a day after Philip Morris International - spun off from Altria in March - and U.S. rival R.J. Reynolds reported quarterly results that also pleased investors.

"Because of the economic uncertainties we all face, Altria is taking steps now to continue adding value to shareholders over the long term," Chief Executive Michael Szymanczyk said.

Altria - owner of No. 1 U.S. cigarette maker Philip Morris USA - is acquiring UST Inc., maker of Copenhagen and Skoal. But because of difficulties in the credit market, Szymanczyk said it had become more expensive to finance the acquisition.

The deal passed antitrust review last month, and the company plans to schedule a shareholder vote in December. Szymanczyk expects the deal to close by the first week of January.

Altria reported net income of $867 million, or 42 cents per share, in the quarter that ended Sept. 30. That compares to $2.63 billion, or $1.24 per share, a year earlier. The Richmond, Va.-based company said revenue increased 5 percent to $5.24 billion.

Revenue and income from continuing operations rose even as cigarette shipment volume declined because of higher cigarette prices and lower overall costs for running the business.

By volume, Philip Morris USA reported declines among all cigarette brands, including Marlboro, Parliament, Virginia Slims and Basic. Marlboro, the best-selling brand in the U.S., gained 0.5 points of market share to end up with 41.6 percent of the U.S. market, according to data from Information Resources Inc.

The volume of Philip Morris USA's cigarette shipments fell 4.8 percent during the quarter from a year ago. Further, the company said it can "no longer accurately predict estimated future cigarette industry decline rates and PM USA is no longer providing this guidance."

"There is no doubt a concern in the short run that consumers could slow their purchases or trade down due to the economic weakness, taxes could go higher in some states, and perhaps a federal excise tax increase could take hold," Stifel Nicolaus & Co. analyst Christopher Growe told investors. "While we acknowledge these risks, we also look to what we view as the cheap valuation and the strong underlying fundamentals as support of our 'Buy' rating."

Excluding one-time costs, Altria said its profit from continuing operations was 46 cents per share. Analysts surveyed by Thomson Reuters, who typically exclude one-time costs, expected earnings of 44 cents per share on revenue of $4.21 billion.

The tobacco company affirmed its 2008 profit forecast of $1.63 to $1.67 per share.

Altria was not alone as cigarette makers found people still willing to spend even as other industries struggled with a pullback in the third quarter.

Philip Morris International Inc. - which sells Marlboros, L&M, Chesterfield and Bond Street brands outside the U.S. - said its profit rose 20 percent as sales climbed and it benefited from favorable foreign exchange rates.

And Reynolds American Inc., the nation's second-biggest tobacco company, raised its full-year forecast Wednesday even though profit fell 41 percent on restructuring and trademark charges. Like Altria, it used higher prices to offset consumption declines.

Altria said Thursday that it saw strong operating income from Philip Morris USA and John Middleton Co., the company's recently acquired cigar business.

Like other U.S. tobacco companies, Altria is focusing on cigarette alternatives - such as cigars, snuff and chewing tobacco - for future sales growth as domestic cigarette consumption declines by 3 percent to 4 percent a year.

The company is test-marketing Marlboro moist smokeless tobacco in the Atlanta area as well as Marlboro Snus in Dallas and Indianapolis. Snus are small, teabag-like pouches that users stick between their cheek and gum.

Altria shares rose 66 cents, or 3.4 percent, to $19.95 on Thursday. Philip Morris International shares rose $1.41, or 3.5 percent, to $42.24, as Reynolds shares rose $2.26, or 5 percent, to $47.42.