Altria Stock Up 30%; What’s Next?

MO: Altria Group logo
Altria Group

Even after being a part of a largely defensive sector, Altria stock (NYSE: MO) saw an impressive rise of close to 30% from its March 2020 lows of this year. Despite a strong rally, at the current price of $40, we believe Altria’s stock is still undervalued. The stock has increased from $31 in March to $40 currently as against the S&P 500 which clocked a 60% rise during the same period. In spite of a healthy rise over recent months, Altria’s stock has underperformed the market as the drop in the stock price during the coronavirus crisis was much less than the broader market’s drop in the first place. Thus, the recovery has been lower than the market. But despite rising 30% in 8 months, Altria’s stock is still close to 11% below its pre-crisis (February 2020) level. We believe that the gradual lifting of lockdowns will lead to higher shipments and revenues in 2021 as supply constraints ease, leading to a possible rise of 20% from its current level. Our dashboard What Factors Drove -44% Change In Altria Stock Between 2017 And Now? has the underlying numbers behind our thinking.

Some of the stock price decline between 2017-2019 is justified by the 31% decline in the P/S multiple. This is despite a cumulative drop of only 1.8% in total revenues between 2017 and 2019. The revenues per share (RPS), in fact, increased marginally (by 0.5%) as the number of shares outstanding decreased by 2%. However, despite this rise in RPS, the P/S multiple declined sharply, mainly driven by the gradual decline in demand for cigarettes as consumers are switching to non-combustible tobacco options. Also, the market believed that Altria had overvalued its 35% stake in JUUL (the company finally recorded a significant impairment charge in 2019) which also took a toll on its stock price.

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The P/S multiple declined from 5.3x at the end of 2017 to 3.7x at the end of 2019. The multiple dropped even further in 2020 before recovering over recent months and currently stands close to 3x. The drop in the P/S multiple in 2020 was led by the outbreak of coronavirus which led to lower consumer demand and lockdown induced supply bottlenecks. However, we believe that the company’s P/S multiple is likely to move closer to its 2019 level which points toward a rise in the stock price in the near term.

Upside Trigger?

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 Altria’s operations are spread across the US, with the lockdowns imposing significant impediments in its supply network. This was reflected in Altria’s Q2 and Q3 2020 results. Altria reported y-o-y decline of 8.7% in cigarette and cigar shipments, while the same declined 0.2% in Q3 2020. Revenue increased during these quarters only because of higher prices charged for its products.

Altria’s stock recovered recently on expectations of a rise in shipments as major economies started lifting lockdowns gradually. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With lockdowns being lifted, Altria’s supply constraints are expected to ease over the coming months. Shipments and sales numbers are expected to pick up from Q4 2020. Rising demand for IQOS, higher cigarette prices, and a normalized supply network will likely result in healthy revenue and margin growth in 2021. As investors’ focus has now shifted to 2021 numbers, the market is likely to overlook the near-term volatility. The recent spike in Covid-positive cases in the US is a cause for worry for the company as re-imposition of another lockdown will slow down the growth in stock price, which to a certain extent, will be offset by the rising sale of IQOS in the US. In the absence of another full-fledged lockdown, Altria’s stock is projected to register strong gains. As per Trefis, Altria’s valuation works out to $48 per share, reflecting a potential upside of 20% from the current market price.

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