Can Altria Stock Surpass Its Pre-Covid Level?

by Trefis Team
+10.37%
Upside
48.29
Market
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Trefis
MO
Altria Group, Inc.
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We believe Altria stock (NYSE: MO) may be a decent opportunity at the moment. MO trades at $41 currently and is in fact down 18% from $50 at the beginning of 2020. It traded at close to $45 in February 2020, just before the outbreak of the pandemic, and is still 9% below that level now. MO stock has gained 30% from the low of $31 seen in March 2020, less than the S&P 500 which is up 70% from its March 2020 lows. MO stock has underperformed the broader market because the drop in the stock when the crisis hit was less than the market in the first place, as it belongs to the defensive sector of tobacco. That said, with the lockdowns being lifted, supply constraints are likely to ease leading to higher shipments. Also, the expectations of rising sales of IQOS e-cigarettes in the US is likely to boost revenues and margins in 2021. This could take the stock to $48 – beyond its February 2020 level – reflecting a potential upside of about 15%. Our conclusion is based on our detailed comparative analysis on Altria stock performance during the current crisis with that during the 2008 recession in our dashboard.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 69% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how MO stock and the broader market performed during the 2007-08 crisis

Timeline for 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

MO vs S&P 500 Performance Over 2007-08 Financial Crisis

MO stock declined from levels of close to $22 in September 2007 (pre-crisis peak) to levels of little over $15 in March 2009 (as the markets bottomed out), implying MO stock lost 28% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $20 in early 2010, rising by 27% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

Mo Fundamentals Over Recent Years

Altria revenues saw a marginal decline from $25.7 billion in 2016 to $25.1 billion in 2019, due to lower cigarette volume sold. Along with lower revenues, margins also declined over recent years with EPS decreasing from $7.28 in 2016 to $3.69 in 2018. MO reported losses in 2019 due to a large impairment charge. MO’s Q3 2020 revenues saw a 4% y-o-y rise, which was mainly due to higher prices charged for cigarettes even though volume sold dropped. Earnings came in at -$0.51/share as against -$1.39/share in the year-ago period.

Does MO Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

MO’s total debt more than doubled from $14 billion in 2016 to $29 billion at the end of Q3 2020, while its total cash decreased from $4.6 billion to $4.1 billion over the same period. At the same time, the company’s cash from operations more than doubled from $3.8 billion to $8.4 billion (last twelve months). Though debt has increased due to recent acquisitions, the company’s increased CFO generation is likely to help MO weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Altria Group, Inc stock has the potential for modest gains once fears surrounding the Covid outbreak are put to rest. Additionally, the recent acquisitions along with the sale of IQOS in the US is likely to drive revenue and earnings in 2021. As per Trefis, Altria’s valuation works out to $48 per share, reflecting an upside of more than 15% from the current market price.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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