Altria stock (NYSE: MO) price has decreased by about 29% in the last three and a half years, when the stock dropped from $56 at the end of 2016 to around $40 as of 25th June 2020. That’s bad news for Altria. But wait a minute, close rival Philip Morris stock (NYSE: PM) price has seen only an 8% drop during the same period. This suggests Altria’s stock price loss was 3.6x PM’s stock loss. This is despite the fact that Altria’s net income margins have largely been higher than Philip Morris’ margins over recent years (except in 2019). Does the stock price movement then make sense? We believe it does and our dashboard Altria vs. Philip Morris: Does The Stock Price Movement Make Sense? has the underlying numbers.
Sure, Altria’s margins were historically higher but they have continuously declined during the 2016-2019 period. Altria’s margins were unusually high at 55% in 2016 due to one-time gain on the SABMiller business combination, post which it has declined to 27.5% in 2018. The company reported losses in 2019 due to a heavy impairment charge related to investment in JUUL and Cronos. On the contrary, Philip Morris’ margins have hovered between 22% and 28% over the last 4 years.
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Additionally, looking at the top line, Altria’s revenues have declined by 2.3% from $25.7 billion in 2016 to $25.1 billion in 2019 as the cigarette shipments decreased on account of changing consumer preferences. In contrast, Philip Morris revenues have increased by 11.6% from $26.7 billion in 2016 to $29.8 billion in 2019, as lower cigarette sales were more than offset by rising demand for its heated tobacco product, IQOS.
The P/E multiple of both companies are not comparable as Altria reported losses in 2019 thus leading to a negative EPS. So, what along with past revenue and margin trend explains the stock price movement? It is the near-term business prospect of these 2 tobacco giants.
How Do Altria’s And Philip Morris’ Businesses Compare?
Let’s have a closer look at the core business prospects. Both companies are big names in the tobacco space. Altria’s business includes combustible products like cigarettes and cigars, and oral tobacco products. Philip Morris’ business comprises of combustible cigarette sales and also heated tobacco product under the brand IQOS.
In order to enter the heated tobacco space, 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. 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.
On the contrary, while Philip Morris continues to see healthy demand for IQOS in Europe, its flagship product has now entered the US market as well, with the FDA granting its approval for IQOS in 2019. Thus, after expanding in other developed and developing nations, IQOS is likely to directly compete with JUUL in the US market which is further expected to hit JUUL’s market share.
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Though tobacco is largely a defensive industry, PM being a global player is slightly more affected due to supply bottlenecks during the lock down, but this is not expected to affect its valuation in any significant way. However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.
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, while Philip Morris valuation works out to a fair price estimate of $80, which is also higher than its current market price.
While Philip Morris looks like a better value than Altria in a post-Covid scenario, 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.