Altria’s Lawsuit Fines Fail to Deter Sanguine Investors

by Trefis Team
-11.40%
Downside
49.91
Market
44.22
Trefis
MO
Altria Group, Inc.
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Phillip Morris USA, subsidiary of Altria Group (NYSE:MO), has recorded charges of $119 million for the fourth quarter, in relation to two judgments in tobacco cases. [1] However, this failed to deter the enthusiasm of the investors who see this stock rising in the long term despite the ever increasing taxes and a stringent regulatory environment. The stock was trading near $29 on Tuesday, close to its 52-week high. The stock is up 15% this year. Altria is the biggest tobacco company in the U.S. and competes with Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI).

We have a $31 price estimate for Altria, which is about 10% above the market price.

See our complete analysis of Altria stock here.

Diluted EPS Revised

Altria has revised its full year guidance for reported diluted EPS to a range of $1.58 to $1.64 from $1.60 to $1.66. [2] The reduction has been primarily due to increased expenses associated with the lawsuit judgments.

The company has also redefined its adjusted diluted EPS, to exclude certain special items such as charges of tobacco and health judgments. The company forecasts its adjusted diluted EPS to be in the range of $2.01 to $2.07. Compared to last year’s figure of $1.90, this represents an increase of 6% to 9%.

Spending Cut on Tobacco Programs

Meanwhile, states have cut back their spend on tobacco programs, aimed to discourage the use of tobacco by 12% this year to $456.7 million. [3] The states collect more than $25 billion in taxes and legal settlements from tobacco  industry but will spend only 1.8% of that figure this year. States have cut their spend on tobacco programs mainly on the back of rising fiscal deficits due to a sluggish economy. This should come as a pleasant surprise for tobacco companies as the percentage of Americans who smoke has declined over the years. Rather, we see a growing demand for smokeless products, which are generally perceived to be less harmful.

Altria, in particular, has benefited from the surge in demand for smokeless tobacco products. The company has seen its market share rising from 41.8% in 2009 to 43.7% for this year. Analysts at Trefis expect the smokeless tobacco products to grow at an annual rate of 7% over the next few years.

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Notes:
  1. Altria Discloses Quarterly Charges Of $119 Million, WSJ, December 5, 2011 []
  2. Altria Records Charges and Interest of $119 Million for Tobacco and Health Judgments Related to the Williams and Bullock Cases, The Street, December 2, 2011 []
  3. Report: States cut funding for tobacco prevention, Yahoo! Finance, November 30, 2011 []
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