Despite an 18% decline in Altria’s (NYSE: MO) stock since the beginning of this year as the spread of the novel Coronavirus rattled the stock markets and the broader economy, at the current price of $40 per share, we believe Altria has a significant downside if there are no signs of abatement of the crisis in May 2020. Altria’s stock is already about 35% lower than it was at the end of 2017, a little over 2 years ago. We estimate that Altria’s stock price could decline to levels of around $27 (worst-case scenario) if its revenues fall by 20% vs. FY’19, its margins remain below 15% in 2020 as it continues paying its staff along with incurring other fixed expenses (the company incurred losses in 2019 due to one-time large impairment cost, margins have been over 20% prior to 2019), and its valuation multiple falls to levels of around 2.5x from 3.6x at the end of FY’19 and 3x currently. Below, we summarize this possible downside case for Altria, which is detailed in our interactive dashboard analysis Altria Group, Inc Downside: How Low Can Altria Group, Inc Stock Go?
So what’s the likely trigger and timing to this downside?
- The global spread of coronavirus has led to a slowdown in industrial and economic activity, thus affecting consumer spending power. Lower consumption is likely to affect demand for Altria’s products, the situation being further exacerbated as partial employment becomes widespread. Supply and operational disruption is mainly projected to take a toll on sales. As most of the economic impact of the crisis started being felt in March, Altria’s Q1 is largely shielded. But we believe Altria’s Q2 results in July will confirm the hit to its revenue, with the management having already withdrawn its Q2 and full-year guidance during the Q1 2020 announcement.
- Specifically, we believe the full-year revenue expectations formed by the market may be closer to $20 billion, about 20% lower than its 2019 revenue of $25.1 billion, and 21% lower than the 2018 revenue of $25.4 billion. Our dashboard shows key components of Altria’s Revenues
- The market isn’t going to stomach this well, and Altria’s P/S multiple could shrink to about 2.5x from 3.6x seen in 2019 and 3x currently.
- The 20% reduction in revenues will not accompany a proportional reduction in expenses, as compensation expenses and other fixed costs like upkeep of machinery are likely to fall by a smaller percentage, whereas the high interest expense due to the recent debt load to finance major acquisitions (Cronos and JUUL) is not expected to see any change. This could result in the net income margin being lower than the historically healthy margin of over 20%. Year 2019 was an exception as a one-time impairment charge led to Altria reporting a loss for the year.
- 20% lower revenue and subdued margins leading to >30% drop in P/S multiple could translate into Altria’s stock price dropping over 30%, taking it to below $30 per share.
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Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.
Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of Altria’s multinational peers like Philip Morris. The complete set of coronavirus impact and timing analyses is available here.
Overall, we believe Altria’s stock price at levels of $38 and below provides a buying opportunity for investors willing to be patient. As per Trefis base-case scenario, Altria’s Valuation works out to $46 per share.