Does Altria Stock Offer Any Major Upside At $50?

+10.91%
Upside
46.86
Market
51.97
Trefis
MO: Altria Group logo
MO
Altria Group

Altria stock (NYSE: MO) currently trades at $50 per share. The stock is almost at the same level at which it was at the beginning of 2020. In February 2020, MO stock traded at $45 and is currently 11% above that level. MO stock has gained 60% from its low of March 2020, much less compared to the 100% jump in the broader market (S&P 500). The stock has underperformed the broader market because the drop in MO stock when the crisis hit was less than the market’s drop in the first place, as it belongs to the defensive sector of tobacco. However, 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 provide a modest boost to the stock. However, the upside is still likely to be a little less than 10% from its current level. You can see Altria upside post Covid for further details.

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 100% 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.
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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 $28.1 billion at the end of Q3 2021, while its total cash increased from $1.3 billion to $3 billion over the same period. At the same time, the company’s cash from operations also increased from $4.9 billion to $8.3 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

In view of the strong rally in Altria Group stock since March 2020, we believe that the stock has little room for growth in the near future even after factoring in an expected improvement in demand from the steady decline in the number of new Covid-19 cases in the U.S.

Altria’s stock is valued at a forward P/EBITDA multiple of 16x, as can be seen in our detailed analysis on Altria EBITDA.

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 Feb 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 MO Return -1% 6% -26%
 S&P 500 Return -1% -6% 100%
 Trefis MS Portfolio Return -1% -10% 254%

[1] Month-to-date and year-to-date as of 2/7/2022
[2] Cumulative total returns since the end of 2016

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