Altria (MO)

Tobacco company Altria (NYSE:MO) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 11.5% year on year to $5.26 billion. Its non-GAAP profit of $1.23 per share was 3.5% above analysts’ consensus estimates.

Company Overview

Best known for its Marlboro brand of cigarettes, Altria (NYSE:MO) offers tobacco and nicotine products.

These companies' performance is influenced by brand strength, marketing strategies, and shifts in consumer preferences. Changing consumption patterns are particularly relevant and can be seen in the rise of cannabis, craft beer, and vaping or the steady decline of soda and cigarettes. Companies that spend on innovation to meet consumers where they are with regards to trends can reap huge demand benefits while those who ignore trends can see stagnant volumes. Finally, with the advent of the social media, the cost of starting a brand from scratch is much lower, meaning that new entrants can chip away at the market shares of established players.

Competitors in the tobacco and nicotine industry include Phillip Morris (NYSE:PM), British American Tobacco (LSE:BAT), and Imperial Brands (LSE:IMB).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $20.99 billion in revenue over the past 12 months, Altria is one of the most widely recognized consumer staples companies. Its influence over consumers gives it negotiating leverage with distributors, enabling it to pick and choose where it sells its products (a luxury many don’t have). However, its scale is a double-edged sword because there are only a finite number of major retail partners, placing a ceiling on its growth. For Altria to boost its sales, it likely needs to adjust its prices, launch new offerings, or lean into foreign markets.

As you can see below, Altria struggled to increase demand as its $20.99 billion of sales for the trailing 12 months was close to its revenue three years ago. This shows demand was soft, a tough starting point for our analysis.

This quarter, Altria reported year-on-year revenue growth of 11.5%, and its $5.26 billion of revenue exceeded Wall Street’s estimates by 13.5%.

Looking ahead, sell-side analysts expect revenue to decline by 3.5% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and indicates its products will see some demand headwinds. At least the company is tracking well in other measures of financial health.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.

Altria has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 70.7% gross margin over the last two years. That means Altria only paid its suppliers $29.34 for every $100 in revenue.

Altria’s gross profit margin came in at 75.9% this quarter, up 6.3 percentage points year on year but still missing analysts’ estimates by 6.2%. Altria’s full-year margin has also been trending up over the past 12 months, increasing by 2.4 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Altria has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer staples business, boasting an average operating margin of 52.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Altria’s operating margin decreased by 6.7 percentage points over the last year. Even though its historical margin was healthy, shareholders will want to see Altria become more profitable in the future.

This quarter, Altria generated an operating profit margin of 34%, down 22.7 percentage points year on year. Conversely, its revenue and gross margin actually rose, so we can assume it was less efficient because its operating expenses like marketing, and administrative overhead grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Altria’s EPS grew at an unimpressive 3.7% compounded annual growth rate over the last three years. This performance was better than its flat revenue but doesn’t tell us much about its business quality because its operating margin didn’t expand.

In Q1, Altria reported EPS at $1.23, up from $1.15 in the same quarter last year. This print beat analysts’ estimates by 3.5%. Over the next 12 months, Wall Street expects Altria’s full-year EPS of $5.21 to grow 2.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Altria has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the consumer staples sector, averaging an eye-popping 40.8% over the last two years.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Altria’s five-year average ROIC was 41.2%, placing it among the best consumer staples companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Altria reported $4.73 billion of cash and $26.06 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $11.35 billion of EBITDA over the last 12 months, we view Altria’s 1.9× net-debt-to-EBITDA ratio as safe. We also see its $1.05 billion of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Altria blew past analysts’ revenue and EPS expectations this quarter. On the other hand, its gross margin missed. Overall, we think this was a decent quarter with some key metrics above expectations. The market seemed to focus on the negatives, and the stock traded down 2.1% to $56.92 immediately after reporting.

Updated: July 10, 2025 at 10:54 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Altria.

There are things to like about Altria. Although its revenue has declined over the last three years, its admirable gross margins are a wonderful starting point for the overall profitability of the business. And while its declining operating margin shows the business has become less efficient, its impressive operating margins show it has a highly efficient business model.

Altria’s P/E ratio based on the next 12 months is 11x. Looking at the consumer staples space right now, Altria trades at a compelling valuation. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $58.55 on the company (compared to the current share price of $58.56).