What’s Next for Big Tobacco after 3 Robust Quarters in 2015?
Pressure on margins
The 3Q15 margins of tobacco companies indicated mixed signals. Companies have been investing heavily in innovative products and other growth initiatives, which are impacting their margins.
9-month operating income
Philip Morris International’s (PM) operating income decreased 9.8% to $9.0 billion for nine months year-to-date, while declining 12.3% to $3 billion in 3Q15. However, PM’s adjusted operating income, excluding unfavorable currency impact, increased 9.3% in 3Q15 and 10.3% for the first nine months of 2015. This was due to favorable pricing, partially offset by unfavorable product volume and mix. As a result, adjusted operating income margin increased 1.4% in 3Q15.
Reynolds American’s (RAI) 3Q15 adjusted operating income increased 64.9% to $1.4 billion in 3Q15, or 36.8% for the nine months ended September 30, 2015. This was primarily due to strong results delivered by RJR Vapor’s Vuse Digital Vapor Cigarette and American Snuff’s Grizzly brand. As a result, RAI’s 3Q15 adjusted operating margin increased 6.4%, to 44.4%.
Altria Group (MO) also reported an increase of 13% for nine months year-to-date, or 15.3%, to $2.3 billion in operating income in 3Q15. This was due to solid net price realization and the benefit from the end of the federal tobacco quota buyout payments. As a result, MO’s 3Q15 operating margin came in at 46.3%, compared to 42.1% in 3Q14.
Vector Group Ltd. (VGR) 3Q15 adjusted operating income increased 9.4% to $71.1 billion compared to $65.0 billion in 3Q14. The increase was due to long-term continued growth for Liggett in a contracting and challenging cigarette marketplace.
Protecting margins
Tobacco companies aim to protect margins through higher pricing, which may lead to lower shipment volume. PM has exposure in the iShares US Consumer Goods ETF (IYK), which provides exposure to a wide range of industries like food, automobile, and household goods. PM covers 6.4% of the total weight of the portfolio.
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