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Why Altria's Earnings Might Be Smokin'


Surviving the economic downturn by raising prices.

How is the Marlboro Man faring during these tough times?

We'll find out on Wednesday.

Tobacco giant Altria (MO) is scheduled to report third-quarter results on Wednesday morning. The Richmond, Virginia-based company is the largest player in US tobacco manufacturing, with just more than 50% market share. Its nearest rivals are Reynolds American (RAI) and Lorillard (LO).

Whether you like to huff, puff, or spit, Altria has you covered: The company sells Marlboro cigarettes (the dominant brand with 41% market share), cigars, and chewing tobacco.

The Street expects Altria to report a profit of $0.47 per share for the third-quarter on revenue of $4.66 billion, according to

When the company reported second-quarter results on July 22, Altria said that its profit increased 8.6%, boosted by its acquisition of smokeless tobacco company UST. The company also benefited from its stake in SABMiller, the world's largest brewer, and lower general expenses.

Cigarette earnings increased 6.7% while volume dropped 6.8%. Marlboro's market share fell 0.6%.

"Altria has taken more than its fair share of the industry decline," says Morningstar's Philip Gorham, who covers the company. "Marlboro is priced at the premium end of the market. So smokers are both quitting and switching to cheaper brands."

To offset consumption decline, Altria has been raising prices. "In the short-term, that has caused problems because of the economic downturn," Gorham tells us.

While acknowledging that volume trends have been soft as of late, the analysts at Stifel Nicolaus remain bullish on the stock.

Christopher Growe and Daniel Stephen, in a research note released today, told their clients to buy Altria, with a price target of $21.

They like the company's meaty dividend yield (nearly 8%), solid balance sheet, strong free cash flow generation, and robust earnings growth potentially leading to an increasing dividend over time.

The analysts aren't the only ones that are fans of Altria. In a recent Q&A, Tom Forester, manager of the five-star Forester Value Fund (FVALX), told us he remains a fan of the company.

"We have owned that stock for years," the portfolio manager said. "We bought a lot of the component companies when it broke up. Valuation is attractive and cash flow is strong. We have tripled our money there in the last few years."

(See Finding Value After a Market Run)

Year-to-date, the stock of Altria is up 24%. It's now trading with a forward P/E multiple of 10.03.
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