MO reported adjusted EPS of $1.23 in the second quarter of 2021, which was up 12.8% over the $1.09 earned in the second quarter of 2020. There were again some special items excluded from those adjusted results, but they were largely valuation and accounting adjustments for BUD, JUUL, and CRON which really don't mean much. For the full year 2021, MO narrowed their guidance by raising the bottom of the range. They now expect adjusted EPS of $4.56 to $4.62, representing growth of 4.5% to 6.0%.
While the reported results look pretty strong, they were benefitted by some timing factors. Most significantly, there was a pretty sizable build up in wholesaler inventories of cigarettes. For the quarter, MO actually reported a 1.4% increase in shipments of cigarettes. However, they estimate that their brands of cigarettes sold at retail decreased by 4.5%. The difference between those two numbers (5.9%) represents about a half a billion cigarettes, and is that wholesale inventory build of MO branded cigarettes. As a whole, MO estimates that for the entire US market, cigarette volumes decreased by 5.0%, which means they did a little better than the overall market and gained back some modest market share in the quarter. Increased pricing was also higher than normal in the quarter, and the deep discount segment grew by 0.4 share points.
Cigar sales were again a strong point, with 8.1% volume growth, but still a relatively small portion of MO.
Oral nicotine continued past trends, with growth in the new pouch segment more than offsetting losses in moist snuff. MO finally achieved enough manufacturing capacity for "on!" to eliminate any sales constraints, and grew some market share, but still has a long way to go to catch the two dominant pouch brands (Swedish Match's Zyn and Reynolds Velo).
The IQOS news is confusing at best. First, due to patent lawsuits and initial adverse ruling delivered in May, MO has suspended doing any further expansion of IQOS in the US beyond the three markets it is already in (Atlanta, Charlotte, and Northern Virginia). Furthermore, they lost significant share in Georgia and North Carolina as they "reallocated promotional and commercialization resources" from those markets to Northern Virginia, where market share did grow. Obviously the legal issue is important, but hard to really see what MO's strategy and goal is for IQOS at this point.
Vaping continued it's comeback, rebounding over 15% from last year. However, JUUL's market share continues to drift lower, now down to 31% from a high of 46% in mid-2019.
Overall, everything about MO remains pretty hazy. For now, they still have brand and pricing power on cigarettes and can modestly grow earnings leaning on that. However, it looks like the new RRP products are reasserting their growth and threatening that cigarette dominance model. And none of MO's RRP products look especially promising. Their "on!" pouches are growing, but the category is dominated by the early mover Swedish Match whose Zyn brand is close to 70% of the market. They own 35% of JUUL, but that company is still adrift, losing market share, and facing piles of lawsuits. IQOS has the best potential, but since MO only licenses it and doesn't own it, it is hard to justify any massive investment in it. Furthermore, current US tax policy gives a big advantage to vaping over HEETS which are mostly still taxed like cigarettes.
So MO's share price is still cheap, but I think rightfully so as their future is very questionable. Perhaps, behind the scenes, they are executing some longer term strategy that will pay off, but it is hard to see what that is.