Altria: A Good Defensive Bet Right Now?

by Trefis Team
+25.41%
Upside
38.27
Market
47.99
Trefis
MO
Altria Group, Inc.
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Altria stock (NYSE: MO) increased around 36% since the late March lows (vs. about 44% for S&P 500) to its current level of $43. This is after falling to a low of $31 on 23rd March, as a rapid increase in the number of Covid-19 cases spooked investors, and heightened concerns of an imminent global economic downturn. With the stock currently about 6% below its February 2020 high of $45, are the gains warranted or are investors getting ahead of themselves or being too conservative? We believe that the stock price increase is justified considering the gradual lifting of lockdowns and the rising sale of IQOS in the US, along with Altria’s plan of expanding the reach of IQOS in the near term. In fact, Altria’s stock still has potential to rise another 8%-10% from its current level. Our conclusion is based on our detailed comparison of Altria’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

How Did Altria Fare During 2008 Slowdown?

We see Altria’s stock declined from levels of around $11 in October 2007 (the pre-crisis peak) to roughly $8 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 25% of its value from its approximate pre-crisis peak. This marked a drop that was smaller than the broader S&P, which fell by about 51%.

However, Altria’s stock recovered post the 2008 crisis to about $11 in early 2010 – rising by 41% between March 2009 and January 2010, as against the S&P which bounced back by 51% over the same period.

In comparison, during the current crisis, Altria’s stock lost 30% of its value between 19th February and 23rd March 2020, and has already recovered around 36% since then. The S&P in comparison fell by about 34% and rebounded by 44%.

Can We Expect Further Gains?

The global spread of coronavirus which led to lockdown in various cities across the globe, affected industrial and economic activity, in turn adversely affecting consumption and consumer spending. Despite tobacco being a defensive industry, Altria’s stock was affected by the crisis as the lockdowns imposed significant hindrances to its supply network, thus affecting volume. This was reflected in Altria’s Q2 2020 results, where cigarette shipments saw a y-o-y drop of 8.8%, affecting Altria’s revenues which saw 3.8% decline while earnings dropped 2.8%.

However, over the coming weeks we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in most of the states in the US compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lockdowns is also giving investors confidence that developed markets may have put the worst of the pandemic behind them. Following the Fed stimulus — which helped 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 now mainly focusing their attention on 2021 results.

As the global lockdowns are gradually being lifted, Altria’s supply constraints are expected to ease over the coming months, with the second half of 2020 likely to be much better than the first six months. In June, PM USA (owned by Altria) re-opened its IQOS boutiques in Atlanta and Richmond. Also, the company’s expansion plans look ambitious and promising. PM USA launched IQOS in Charlotte with the opening of its boutique under enhanced safety protocols in July and it expects HeatSticks to be sold in more than 700 retail stores across the Atlanta, Richmond, and Charlotte markets by the end of August. Over the next 18 months, PM USA plans to expand IQOS to four additional markets, partner with trade retailers to make IQOS devices more broadly available, and expand HeatSticks distribution. Additionally, to enhance shareholder returns, Altria increased its quarterly dividend from $0.84/share to $0.86/share, thus taking the annualized dividend to $3.44/share from $3.36/share.

With investors’ focus having shifted to 2021 numbers, factors such as the rising demand for IQOS, higher cigarette prices, and expansion of IQOS into new geographies in the US is set to be reflected in higher revenue and better earnings in 2021. Along with improved top and bottom line, enhanced shareholder returns are likely to drive the stock price higher. As per Altria’s valuation by Trefis, we have a fair price estimate of $48 per share for the company’s stock, which reflects a potential upside of about 13% from current level.

For better insight into the tobacco space, see how Altria’s stock performance compares with Philip Morris.

 

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