When people think about staple products, household essentials like diapers, soap, and paper towels typically come to mind.

However, tobacco products represent one of the largest and most reliable staples markets globally due to their addictive nature.

Tobacco use is highly addictive due to the nicotine found in these products. Once regular use is established, it becomes very difficult for users to quit due to both psychological and physical dependence on nicotine.

As a result, demand for tobacco has proven relatively inelastic.

Customers will continue purchasing tobacco products even with rising prices or increased regulations on marketing and sales.

One of the leading players capitalizing on this captive customer base is Altria (MO), the largest tobacco company in the United States.

Altria holds a 46% share of the U.S. cigarette retail market.

Despite stricter rules and regulations that have made the industry tougher, the company has managed to keep its place at the top.

The market has become less crowded over the years, which means that a few key players now have more room to work and grow.

Altria’s deep-rooted brand and loyal customer base help it thrive even when competitors struggle to keep up with new rules.

Over time, the tobacco industry has had to change how it does business. Traditional cigarettes, while still popular, have been slowly giving way to alternatives like e-vapor products and oral nicotine pouches.

Altria has been quick to adapt. Instead of relying solely on classic smokeable products, the company has expanded its range through acquisitions to include newer options that appeal to a changing customer base.

By embracing new products, the company is not only keeping current customers interested but also reaching out to new ones who may be looking for alternatives to smoking.

Another key part of Altria’s business model is its strong distribution network. The company makes sure its products are available in a wide range of outlets.

This means that whether you are shopping at a local store or a larger retail chain, you are likely to find an Altria product on the shelf.

This accessibility is a big factor in keeping customer loyalty strong. When people know they can easily get their preferred product, they are more likely to stick with the brand.

With a stable customer base reluctant to quit tobacco use, Altria has been able to generate high and reliable returns.

In the last three years, Altria’s Uniform return on assets ‘’ROA’’ reached all-time highs above 200%, demonstrating the powerful addictive pull of nicotine on regular consumers.

Take a look…

These figures indicate a robust business, with efficient use of assets to generate profits.

However, the market still has concerns about the tobacco industry.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will fall to around 115%.

The market’s pessimistic view is caused by regulations on the tobacco industry tightening considerably worldwide in recent years and a decrease in the number of smokers.

The regulated nature of the tobacco industry might sound like a hurdle, but it can actually work in favor of companies like Altria.

Fewer players can handle the strict rules, which leaves more room for the big names to do well.

With a strong grip on its market, Altria is able to push through the challenges that come with tighter controls.

Additionally, the anticipated menthol cigarette ban was pulled back on recently by the new administration, lifting a major headwind from the company’s shoulders.

Lastly, while the smoking population decreases year over year, Altria manages to keep prices high. This offsets revenue lost coming from fewer people smoking.

Investors have benefited from the company’s steady cash flows and dividends over decades, capitalizing on one of society’s most stubborn habits.

Going forward, tobacco is projected to remain a sizable global market.

For Altria, tobacco’s staple nature will likely continue driving strong financial performance for many years to come.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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