Altria Stock Drops Below Pre-Covid Level – What’s Next?

by Trefis Team
+7.43%
Upside
50.32
Market
54.06
Trefis
MO
Altria Group, Inc.
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We believe Altria stock (NYSE: MO) is a decent investment opportunity currently. MO stock trades at $44 per share and is, in fact, down more than 12% from the levels of $50 seen at the beginning of 2020. In February 2020, the stock traded at $45 and is currently 3% below that level, as well. MO stock has gained 39% from the low of $31 seen in March 2020, less than the S&P 500 which is up 105% 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 gradually easing up, leading to higher shipments. Also, the expectations of rising sales of IQOS e-cigarettes in the U.S. are likely to boost revenues and margins in 2021 and 2022. This could take the stock well over $50 – beyond its January 2020 level – reflecting a potential upside of more than 20%. Our conclusion is based on our detailed comparative analysis on the performance of Altria stock during 2008 recession vs now in our dashboard.

2020 Coronavirus Crisis

Timeline of 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 106% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

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 $70 in September 2007 (pre-crisis peak) to levels of $15 in March 2009 (as the markets bottomed out), implying MO stock lost 78% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of around $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 $25.6 billion in 2017 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 $5.31 in 2017 to $3.69 in 2018. MO reported losses in 2019 due to a large impairment charge. However, revenues recovered to $26.2 billion in 2020 on the back of benefit from acquisitions and higher cigarette pricing. EPS also increased to $2.40 in 2020.

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 2017 to $29.5 billion at the end of Q3 2021, while its total cash increased from $1.3 billion to $1.9 billion over the same period. At the same time, the company’s cash from operations also increased from $4.9 billion to $6.1 billion (last twelve months). Though debt has increased due to recent acquisitions, the company’s increased CFO generation and cash balance 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-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
  • October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
  • Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect an improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 and 2022 results, we believe Altria Group stock has the potential for some gains once fears surrounding the Covid outbreak are put to rest Additionally, the recent acquisitions along with the sale of IQOS in the U.S. is likely to drive revenue and earnings in the coming quarters. According to Trefis, Altria valuation works out to $53 per share.

 

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Nov 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
MO Return -8% 7% -35%
S&P 500 Return 1% 22% 105%
Trefis MS Portfolio Return -3% 46% 297%

[1] Month-to-date and year-to-date as of 11/29/2021
[2] Cumulative total returns since 2017

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