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Altria Group Runs A Very High Margin Business

Cannabis Products. Flickr Image

Altria Group, Inc. or Altria (NYSE:MO) runs a very profitable business.

The company’s extraordinary profitability can be seen from the perspective of its margins.

In this article, we will look at Altria’s margins, including its gross profit margins, operating profit margin and net profit margin.

Additionally, we will also look at Altria’s product segments and find out their respective margins.

From the margins, we can find out which Altria’s product segment is the most profitable and thus, makes the most money for the company.

Let’s explore Altria’s margins!

Altria’s Gross Margin

Altria gross margin

Altria gross margin

* Gross margin is a GAAP measure and is calculated by the author using Altria’s TTM revenues net of excise taxes and TTM costs of sales.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Altria’s revenues net of excise taxes and costs of sales are extracted from the company quarterly and annual reports.

Let’s first explore Altria’s gross margin or gross profit margin as shown in the chart above for the period from 2017 to 2020.

From the first look at the chart, you will notice that Altria’s gross margin has been north of 60%, indicating that the company runs a very high margin business.

While Altria’s gross margin may seem like the envy of many companies, the figures have remained mostly flat between 2017 and 2020, and have only slightly increased by 1 percentage point over the past 4 years.

As of 2020 Q4, Altria’s gross profit margin reached a whopping 62.5% on a TTM basis.

Keep in mind that the gross margin takes into consideration only the costs of goods sold and there are many other expenses that the gross margin has not taken into account yet.

Let’s look at more.

Altria’s Operating Companies Income (OCI) Margin

Altria OCI margin

Altria OCI margin

* OCI margin is a non-GAAP measure and is calculated by the author using Altria’s TTM revenues net of excise taxes and TTM OCI.
* OCI figures are computed by Altria and it excludes certain income and expense items that the company’s managements believes are not part of underlying operations.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Altria’s revenues net of excise taxes and OCIs are extracted from the company quarterly and annual reports.

Altria’s OCI margin is almost similar to the operating profit margin except that the OCI excludes certain income and expense items which the company deems not related to the underlying business.

Nevertheless, the OCI margin has the same function as the operating margin in which it is meant to measure the operating strength of Altria.

All told, Altria’s OCI margin reached a new high at nearly 54% as of 4Q 2020 on a TTM basis.

Over the years, Altria’s core operations have got more efficient and the improving operating efficiency has resulted in an increasing OCI margin which reached north of 50% in 2020.

Altria’s Operating Margin

Altria operating margin

Altria operating margin

* Operating margin is a GAAP measure and is calculated by the author using Altria’s TTM revenues net of excise taxes and TTM operating income.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Altria’s revenues net of excise taxes and operating income are extracted from the company quarterly and annual reports.

As discussed, the gross margin has only included the costs of goods sold while leaving out other expenses items such as research and development costs, marketing, administrative, etc.

Now, the operating margin is taking care of all of these expenses by including them during computation.

Keep in mind that the operating margin has not included taxes and interest expenses yet.

That said, Altria’s operating margin reached 52% in 2020 4Q on a TTM basis, a record high for the company since 2017.

Over the past 4 years, we can see that Altria’s operating margin has steadily gained strength and increased by nearly 3 percentage points to reach the 52% level.

The increasing operating profit margin bodes well for not only Altria but also investors as it means the company has been increasingly efficient in its core operations.

An increasingly efficient business operation certainly churns out more profits and may possibly result in a higher stock price and dividend in the future.

Altria’s Net Margin

Altria net profit margin

Altria net profit margin

* Net margin is a GAAP measure and is calculated by the author using Altria’s TTM revenues net of excise taxes and TTM net earnings attributable to the company.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Altria’s revenues net of excise taxes and net earnings attributable to the company are extracted from the company quarterly and annual reports.

Altria’s net profit margin takes care of all of the company’s costs and expenses, including income taxes and interest charges.

Additionally, the net margin also includes income and expense items from investment such as gains or losses from investments.

According to the chart, the trend of Altria’s net margin has been largely the opposite of what we have seen so far in the gross and operating margin.

That said, Altria’s net profit margin or net income margin has been on a decline since 2017.

In particular, Altria’s net margin had gone massively lower between 2017 and 2019 and plunged to as low as -6.5% in 4Q 2019.

The plunge in Altria’s net margin between 2017 and 2019 had been due to the investment loss in JUUL and Cronos.

However, Altria has managed to reverse the plummeting net margin since 2Q 2020.

As a result, Altria’s net margin turned positive in the 2nd half of 2020 and reached more than 20% as of 4Q 2020.

Keep in mind that Altria used to have a net profit margin that was north of 50% back in 2018.

Although Altria’s net margin managed to top 20% in 2020 Q4, it was still way below its historical high of 50% reported in 2018.

Altria’s Product Segment Margins

Altria product segments

Altria product segments

For your information, Altria has 3 major product segments, and they are:

1. Smokeable products,
2. Oral tobacco products, and
3. Wine.

Altria’s largest product segment is the smokeable or combustible product and it gets its revenue or sales from cigarettes and cigars.

Some of the famous brand names under the cigarette and cigar products are the popular Marlboro and Black & Mild.

The 2nd major product segment is Altria’s oral tobacco or non-combustible product segment and its revenue source comes from selling smokeless tobacco products.

The brand names under Altria’s oral tobacco product segment range from Copenhagen, Skoal, on!, Red Seal, and etc.

Altria’s smallest product segment is the wine category.

Ste. Michelle is the major brand name under Altria’s wine sector and it produces and markets premium wines sold under various labels, including Chateau Ste. Michelle, 14 Hands and Stag’s Leap Wine Cellars.

Altria’s Smokeable Products Margin

Altria smokeable product margin

Altria smokeable product margin

* Smokeable product adjusted OCI margin is a non-GAAP measure and is calculated by the author using Altria’s TTM smokeable product revenues net of excise taxes and TTM adjusted smokeable product OCI.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Altria’s smokeable product revenues net of excise taxes and adjusted smokeable product OCI are extracted from the company quarterly and annual reports.
* Altria’s adjusted smokeable product OCI used in the margin computation does not come from the company’s recast or restated numbers adjusted for comparison purposes.

According to the chart, Altria’s smokeable or combustible product margin or specifically, the adjusted OCI margin, has been on a rising trend since 2017.

As of 2020 Q4, Altria’s smokeable product adjusted OCI margin reached a whopping 56% on a TTM basis.

Over the previous 4 years, Altria’s smokeable product adjusted OCI margin has increased by as much as 4 percentage points to reach its current level of 56% in the latest quarter.

Again, the OCI margin is meant to measure Altria’s operating strength, its smokeable product operations in specific.

All told, the increasing adjusted OCI margin seen in Altria’s smokeable product segment means only one thing, that Altria’s cigarettes and cigars have increasingly become more profitable.

Altria’s Oral Tobacco Products Margin

Altria oral tobacco product margin

Altria oral tobacco product margin

* Oral tobacco product adjusted OCI margin is a non-GAAP measure and is calculated by the author using Altria’s TTM oral tobacco product revenues net of excise taxes and TTM adjusted oral tobacco product OCI.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Altria’s oral tobacco product revenues net of excise taxes and adjusted oral tobacco product OCI are extracted from the company quarterly and annual reports.
* Altria’s adjusted oral tobacco product OCI used in the margin computation does not come from the company’s recast or restated numbers adjusted for comparison purposes.

According to the chart above, Altria’s oral tobacco or non-combustible product margin is even higher at more than 70%.

Between 2017 and 2020, Altria has managed to grow its oral tobacco product segment margin from 68% reported in 4Q17 to a massive 72% reported in 4Q20.

Again, the OCI margin is meant to measure the specific product segment operating strength.

In Altria’s case, the increasing OCI margin indicates an improving operating efficiency for its non-combustible product segment.

The 4 percentage points margin increment in the oral tobacco product meant a lot to the company and its investors and it’s a great feat that only a few can achieve, especially for an established company like Altria.

In short, Altria’s non-combustible tobacco product segment has the highest OCI margin at over 70%, meaning that it’s also been one of the most profitable product segments for the company.

Altria’s Wine Products Margin

Altria wine product margin

Altria wine product margin

* Wine product adjusted OCI margin is a non-GAAP measure and is calculated by the author using Altria’s TTM wine product revenues net of excise taxes and TTM adjusted wine product OCI.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Altria’s wine product revenues net of excise taxes and adjusted wine product OCI are extracted from the company quarterly and annual reports.
* Altria’s adjusted wine product OCI used in the margin computation does not come from the company’s recast or restated numbers adjusted for comparison purposes.

In contrast, Altria’s wine product margin, specifically its adjusted OCI margin, has been on a decline between 2017 and 2020.

As of 2020 4Q, Altria’s wine product margin reached less than 10%, the lowest in the last 4 years.

Between 2017 and 2020, Altria’s wine product margin has declined by more than 10 percentage points, from more than 20% reported in 4Q17 to only 8.6% in 4Q20.

Altria’s wine product margin has begun to decline even before the arrival of the COVID-19 pandemic.

What is worst is that the decline in Altria’s wine product margin does not seem like a one-time event but a secular slowdown of the business.

The COVID-19 outbreak has further worsened the wine business and pushed the margin to go even lower.

In short, Altria’s wine business is going downhill.

Summary

In conclusion, Altria’s consolidated core operations have not been affected as their respective margins have been high and have even improved between 2017 and 2020.

Improvement in margins can be seen at the gross and operating level for Altria.

In fact, Altria’s consolidated gross margins and operating margins have soared to record highs as of 2020 4Q, largely unaffected by the negative impact of the COVID-19 pandemic.

The only affected margin was Altria’s net profit margin which had seriously dived below 0% in multiple quarters between 2019 and 2020, and reached as low as -6.5% at one point in the same period.

Upon checking, Altria’s net margin has been negatively impacted by the write-downs or impairment charges due largely to the investment loss in JUUL and Cronos.

When we looked at the breakdown of Altria’s products by segment, its non-combustible product has the highest operating (OCI) margin at more than 70% up until 2020 4Q.

Altria’s smokeable product segment claimed the 2nd spot at over 50% operating (OCI) margin between 2017 and 2020.

Altria’s wine product segment has been negatively affected and got even worse in the age of the COVID-19 when the operating (OCI) margin reached a record low at only 8.6% in Q4 2020.

References and Credits

1. Financial figures in all charts were obtained and referenced from Altria’s quarterly and annual releases which can be found in Altria Earnings Releases.

2. Featured images are used under Creative Common Licenses and are obtained from Elsa Olofsson and Patrick Harris.

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