Innovation Acceleration Expected From Altria Group

RICHMOND, Va. — Altria Group Inc. has entered a period of "accelerated innovation," particularly regarding its Marlboro brand, according to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC.

Innovation in cigarettes, smokeless and non-combustible products will continue to be an integral part of Richmond-based Altria's strategy for the next several years, she wrote in a Wednesday research report.

"We remain impressed by [Altria's] brand stewardship of Marlboro and its ability to keep the brand relevant through product, packaging and marketing innovation, achieving a healthy balance between profitable growth and share gains," said Herzog.

Her comments came on the heels of investor meetings Wells Fargo recently conducted with Altria CEO Marty Barrington, Chief Operating Officer Howard Willard and Chief Financial Officer Billy Gifford, from which the managing director reiterated an "outperform" rating on the tobacco company's stock.

"We came away incrementally more positive that [Altria's] multiple growth and cost-savings levers will drive accelerated earnings growth over the next few years," Herzog said.

She noted that these five things will make Altria a successful company for years to come:

• "[Altria] will continue to make disciplined, smart investments behind its Marlboro brand architecture, which we believe has a long runway and is not yet fully unleashed;
• [Altria] should continue to generate strong net price realization through sophisticated and efficient promotional strategies, especially given an improving adult tobacco consumer;
• [Altria] continues to strike a healthy balance between Marlboro's profitability and share growth while keeping the brand relevant;
• [Altria]  remains focused on growing new income streams taking a portfolio approach, particularly on non-combustible/vapor products, funded by the strong cash flows from combustibles; and
• [Altria] will act in the best interest of shareholders with regards to its SABMiller ownership."

The Wells Fargo executive also pointed out Altria remains committed to vapor category leadership. "We are encouraged that management's tone around the vapor category remains cautiously optimistic. We are now more confident [Altria] has sharpened it focus with regards to e-cigs/vapor and will be successful leveraging its war chest of cash, sizeable infrastructure, deep understanding of the tobacco consumer and entrenched position at retail," concluded Herzog.