UPDATE 3-Altria profit beats view, sees 2009 challenges

* EPS 46 cents from continuing ops beats analysts view 44 cts

* Philip Morris USA market share dips to 50.5 pct vs 51

* Says hard to tell if UST will be accretive in 12 mos

* Sticks by 2008 forecast, sees difficult 2009 economy

* Shares up 2.8 pct; Reynolds, Philip Morris Intl rise (Adds analyst, company comment, byline)

By Brad Dorfman

CHICAGO, Oct 23 (Reuters) - Altria Group Inc MO.N profit bested expectations on Thursday as it was able to charge more for cigarette brands like Marlboro, but fears of a deep recession could test consumer loyalty to its products in 2009.

The largest U.S. cigarette maker said it will focus on making sure brands like top-seller Marlboro offer the right value to consumers as the economy deteriorates.

CEO Michael Szymanczyk declined to say if that would include price cuts down the road.

“I think that the economic circumstance in ‘09 that we’ll all operate in is likely to be difficult,” Szymanczyk said during a call with analysts.

Cigarettes are viewed as relatively recession resistant because of the addictive nature of the product and the strong brand loyalty of its customers.

Altria, as well as Philip Morris International Inc PM.N and Reynolds America Inc RAI.N, were all able to boost cigarette prices in the third quarter and grow profits. PMI and Reynolds reported results on Wednesday.

Shares in all three companies rose on Thursday, with Altria up 2.8 percent, PMI up 3.7 percent and Reynolds gaining nearly 5 percent.

But with U.S. excise taxes likely to rise in 2009 and the economy weakening, loyalty toward premium brands could come under fire.

“There’s some things on the horizon, primarily the tax hikes, which are looking more and more likely, that may push prices up to such a point where consumers may start trading down,” Morningstar tobacco analyst Philip Gorham, said, adding that “2009 will be the litmus test” for brand loyalty.

Szymanczyk said some consumers may have already tried lower-priced options like rolling their own cigarettes or smoking small cigars, but that the company had not seen a move in the overall discount market to challenge its premium brands.

Altria’s top-selling Marlboro brand saw its share of the U.S. market dip to 41.6 percent from 41.8 percent in the second quarter. Market share for the entire Philip Morris business fell to 50.5 percent from 51 percent.

Szymanczyk noted that share can fluctuate quarterly, due to items like promotional spending. Marlboro share was up one-half a percentage point from the 2007 third quarter, while total Philip Morris market share was only down one-tenth of a percentage point.


Profit from continuing operations was 46 cents a share, excluding one-time items, compared with 40 cents a share a year earlier. The company spun off the Philip Morris International cigarette business in March.

Analysts on average forecast 44 cents, according to Reuters Estimates.

Net income fell 67.1 percent to $867 million, or 42 cents a share, due to the spinoff of Philip Morris International.

Revenue excluding excise taxes rose 4.6 percent to $4.20 billion. Analysts on average forecast $4.22 billion.

Altria's tobacco operations, which include Philip Morris USA and the John Middleton cigar business, helped offset increased allowances for losses at the Philip Morris Capital Corp and lower earnings from a stake in brewer SABMiller PLC SAB.L.

The Philip Morris USA unit shipped 4.8 percent fewer cigarettes, with the total falling to 44.9 billion.


Altria also said said on Thursday it still had fully committed financing for its $10.4 billion acquisition of smokeless tobacco maker UST Inc UST.N, but that conditions in the public debt market meant it could no longer say if the deal would add to earnings within 12 months as originally planned.

The deal has passed U.S. antitrust review. But earlier this month, the companies extended the deadline for completion of the deal to January. Lenders said it would be better to close the deal in 2009 amid a credit crunch.

For all of 2008, Altria said it still sees earnings of $1.63 to $1.67 a share, before one-time items.

Altria shares were up 55 cents at $19.84 on Thursday on the New York Stock Exchange. (Editing by Maureen Bavdek, Phil Berlowitz)