Altria Has Risks, But These Triggers Can Move The Stock Up

MO: Altria Group logo
Altria Group

Altria (NYSE:MO) stock lost more than 35% this year, declining from $49 to $31. However, it then increased by nearly 25%, from $31 to a little over $39 (as of July 6, 2020). This means that it is almost 20% below where it started this year. Why? While Altria benefited from consumers stocking up on tobacco as the pandemic started to spread, potential restrictions to consumer movement and pattern of store closures were still some of the huge risks to consider. From a longer term perspective, consumers shifting away from Altria’s Marlboro and other premium products was another risk to account for. But is this all? There is more to this story. Trefis’ price for Altria Group is $48, about 25% above the market price of $39.50 (as of July 6, 2020). Here is why. 

These Triggers Can Give Momentum To Altria’s Stock

The first trigger is Altria’s revenues. We forecast the company’s 2020 sales at $20.1 billion, which means a growth of 1.5% vs 2019. This is excellent considering that Covid-19 has ravaged the economy so much that some industries such as hospitality, leisure, retail, and airlines are looking at 20%-40% drops in revenue for the full year. Furthermore, the headwinds are temporary. Tobacco is generally considered a recession-proof business but Covid-19 created an uncertainty around consumer movement, and consequently, access to Altria’s products. However, it is now clear that Altria is benefiting from early stocking and many of the stores that sell its products are deemed essential by the government, and hence open. The other potential boost to sales is the roll out of IQOS – which is the heated tobacco system that leads to less toxins. The true impact of this roll out could be visible as the pandemic comes under control.

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The second trigger is net margin. After losses incurred in 2019, Altria is likely to bounce back to 35%+ net margin. This also gives it a lot of cushion to absorb any unforeseen demand shocks from Covid-19.

So What Does This Mean For Share Price?

The combination of the above will imply 2020 EPS of $3.83 per share. How much should the market pay for each dollar of Altria’s earnings? As a reference, to earn close to $3.83 per year from a bank, you’d have to deposit about $350 in a savings account today, so about 90x the desired earnings. But Altria is a much riskier business than putting money in a bank. There is concern that the regulations in the U.S. could raise the minimum age for buying tobacco to 21. In addition, over the long run, tobacco product volumes can be impacted as consumers continue to become more health conscious, and better understand the health implications of vaping vs smoking. And what does this mean? Simply that you will demand a higher return for the dollar you invest in Altria because as an investor, you will be taking these risks. The crux is that we apply a P/E of 12.5 for Altria, which is roughly in line with previous years. This multiple is a blended mix based on Altria’s historic figures, current trailing multiple, and forward looking multiple. 

With a P/E ratio of 12.5 and expected EPS of $3.83, we arrive at fair value of $48 for Altria’s stock. With the current market price a little under $40, there is a significant potential to unlock more value for investors.

Are there any other stocks out there that can unlock value? The answer is yes! Which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.


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