Altria stock looks good, even if NJOY is subsidized (NYSE:MO)

Altria (NYSE: MO) might be the second largest tobacco stock by market cap, but it has lagged woefully behind peers like Philip Morris ( PM ) and even British American Tobacco ( NYSE:BTI ) in its transition to alternatives to tobacco. There is hope for change now though.

In late June, the company received marketing authorization for the menthol products of its vape brand NJOY in the US. This has led to an accelerated price increase for MO of 12% since then, which has been supported by share buybacks worth 2.75% of the stock’s current market cap. For perspective, by then, its price was up 10% year-to-date (“YTD”).

However, I argue here that it is quite likely that NJOY will take time to start making a significant revenue contribution. In fact, there could be a near-term price correction for MO, although the stock still looks good because of its dividend.

Negligible impact on NJOY’s revenue…

The increase in the price of MO after the market clearance from the US FDA was expected, considering that the US is the largest vape market in the world. It projected revenue of $8.8 billion by 2024, which is 33% of global revenue. British American Tobacco, which also received similar approvals, saw its price rise sharply following the news.

But a sentimental price impact is one thing, a financial impact quite another. Right now, Altria makes negligible revenue from tobacco alternatives. The table below presents a segment breakdown of Altria’s net income in the first half of 2024 (H1 2024).

Smoking products still bring in a large share of revenue, at over 88% of the total at this time. Oral tobacco brought in about 11.6%, while revenue from the “All Other” segment, which includes NJOY, was just 0.2% of the total.

…but progress is visible

That said, the segment itself has made progress. All Other revenue grew 2.4x YoY in the first half of 2024. NJOY’s shipment volume figures are also encouraging, as seen from the following:

• Consumables shipments were 23.4 million units in H1 2024. This is an increase of 1.8% from June 1, 2023 (when the brand was acquired) to the end of 2023 last year. Furthermore, assuming last year’s shipment numbers are split equally across each month, the sequential growth in H1 2024 over H2 2023 is a much higher 18.7%.
• The volume of shipments of NJOY devices was 2.8 million in the first half of 2024, an increase of even more than 2.15 times from June 1, 2023 to the end of the year. Making the same assumptions as consumables on the monthly breakdown of shipments, the sequential growth in H2 2024 is even higher at 2.5x.

Can NJOY make a significant contribution to revenue?

Whether this translates into increased revenue remains to be seen. My estimates for potential revenue from NJOY for the rest of the year show that tobacco alternatives, defined as the “All Other” category in this case, are unlikely to see a significant increase in revenue contribution.

To make these estimates, we assumed the following here:

• The entire revenue from All Other Segments is in the NJOY account in the first half of 2024.
• For simplicity, revenue per unit is the same for consumables and devices. This results in revenue per unit of $0.8 per unit in H1 2024.
• Sequential volume growth in H2 2024 is the same as in H1 2024.

The resulting revenue would then be $29.2 million in the second half of 2024. Full-year revenue would reach $51.2 million. If Altria’s total net revenues come in at the average of analysts’ 2024 Seeking Alpha estimates of $20.4 billion, the All Other segment’s share would grow to just 0.25%.

In other words, for NJOY to contribute 1% of Altria’s net revenues in 2024, shipment volumes would need to grow 767% sequentially in H2 2024. Even with marketing authorization in place, this seems doubtful, especially as NJOY faces competition in the US market from much more established brands such as British American Tobacco’s Vuse and Juul, in which Altria previously had a stake (see chart below).

Based on current estimates and the market environment, it will take at least 2026 until NJOY can contribute at least 1% of revenue. In other words, Altria will likely continue to lag the competition in its transition to tobacco alternatives.

Outlook EPS and market multiples

However, apart from the sentimental impact of developments related to NJOY, this means that the price will be guided by the company’s performance in smoking products, which are earning.

On that front, there is positive news on earnings guidance. From the original guidance range of $5-$5.15 for adjusted diluted earnings per share (“EPS”), the range has now been narrowed to $5.07-$5.15. That brings its non-GAAP price-to-earnings (“P/E”) ratio to 10.1x, which is higher than the stock’s five-year average of 9.6x.

This indicates that the price may fall 5% from current levels. However, there are also dividends to consider and in fact are the key investor attraction for MO. The forward dividend yield is 7.6%. There is a bit of risk to this projection as well, given that the payout ratio is expected to be 51% for 2024. This means that even after a decline in prices, investors can still see a positive net return of 2, 5% in the near future.

What’s next?

The indicated net return might be positive, but it is not convincing. At the same time, it’s unlikely that dividend investors will only consider profits for 2024. If Altria’s compound annual earnings growth rate (“CAGR”) of 11.5% over the past five years continues into the future, its dividend can continue to grow too. And from a passive returns perspective alone, this still makes it a Buy.

But for investors looking for capital gains after the recent rapid rise in MO prices, now is not the time. Especially since NJOY’s revenue forecasts don’t show a convincing turn to tobacco alternatives.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.