Altria’s stock (NYSE: MO) lost about 32% of its value in the last 3 years, with the stock price dropping from $56 at the end of 2016 to $38 as of 18th May 2020. What’s surprising is that during the same period, Altria’s revenues remained almost stable. Our interactive dashboard Why Is There A Mismatch In The Rate At Which Altria Group, Inc’s Revenues And Stock Price Have Changed? gives a detailed picture of how stock and revenue moved for the company over recent years.
But how was this slide in stock price possible with Altria’s revenues seeing a decline of barely 2% between 2016 to 2019. Well, of course there is a reason – it’s earnings, profits earned after all the expenses and taxes. Turns out Altria’s earnings margins (profits as a % of revenue) steadily dropped over the last few years from 55.3% in 2016 27.5% in 2018. This was followed by the company reporting losses in 2019 when margins crashed to -5.1%. How did Altria see such a sharp deterioration in profitability despite revenue being almost stable? Dive into our interactive dashboard on Altria’s expenses for understanding this diversion.
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One major factor – Altria’s big entry in e-vaping with an investment in JUUL and Cronos in 2019. Altria had invested about $12.8 billion for a 35% stake in JUUL Labs, valuing the e-vapor giant, which has a market share of over 70% in the US, at close to $38 billion. A majority of analysts in the market believed that Altria had overvalued JUUL. This fear came to be true when Altria recorded an impairment of its value in JUUL and Cronos in Q3 2019. For the full year 2019, Altria recorded an impairment of over $10 billion reflecting reduction in the value of its holdings in these two companies. The FDA crackdown on e-cigarettes and many states in the US banning flavored e-cigarettes following reports of deaths due to vaping is expected to hit JUUL the hardest, which has led to the value of Altria’s investment in JUUL dropping just months after investing. These debt-financed investments have also led to interest expense almost doubling from around $0.7 billion historically to $1.3 billion in 2019.
Combination of these factors: revenues falling by 2% and margins crashing to negative meant earnings per share (EPS) declined sharply from $7.28 in 2016 to -$0.70 in 2019. This led to the P/E multiple turning negative (which is not meaningful).
Further the market seems to have lowered its near-term outlook for Altria due to the ongoing crisis. The global spread of coronavirus has led to a slowdown in industrial and economic activity, thus affecting consumer spending power which could affect demand for Altria’s products to a certain extent. Supply and operational disruption is mainly expected to take a toll on sales compared to earlier projections, while compensation expenses and other fixed costs like upkeep of machinery are likely to fall by a smaller percentage, leading to margins being lower than the historical average. In the worst-case scenario of the current crisis not abating anytime soon, Altria’s stock could fall below $30. However, if there are signs of the current crisis abating anytime by end of Q2 2020, we believe there is an upside with an opportunity for a rise in EPS and P/E multiple. As per Altria’s valuation by Trefis, we have a fair price estimate of $48 per share for the company’s stock, higher than its current market price of $38.
In contrast, close rival Philip Morris’ stock fell 12% despite 12% rise in revenues. At this point it would be interesting to know how Altria’s revenue trends stand in comparison to Philip Morris.