We believe that Vector Group stock (NYSE: VGR), a relatively small tobacco company, currently is a better pick compared to the tobacco giant Altria stock (NYSE: MO), given Vector’s comparatively lower valuation of 1.1x trailing revenues vs. 2.9x for Altria. This gap in the valuation doesn’t make sense in our view, given Vector’s superior revenue growth, and profitability, as discussed below.
If we look at stock returns, Altria, despite a fall of 10% year-to-date, has outperformed Vector, down 15%, as well as the broader markets, with the S&P500 index falling 20%. There is more to the comparison, and in the sections below, we discuss why we believe VGR stock will offer better returns than MO stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Altria vs. Vector Group: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Vector’s Revenue Growth Is Better
- Vector’s sales growth of 5.3% over the last twelve months is much better than -3.5% for Altria.
- Even if we were to look at a longer time frame, Vector has outperformed, with its sales rising at an average annual average growth rate of 2.7% to $1.2 billion in 2021, compared to $1.1 billion in 2018, while Altria’s sales grew at 0.9% to $26.0 billion in 2021, compared to $25.4 billion in 2018.
- Altria sells its tobacco products in the U.S. markets. Revenue is generated from the sale of smokable and smokeless products. Due to supply disruptions, the company’s revenue growth was impacted during the pandemic.
- Altria sold its wine business for $1.2 billion last year, with an increased focus on smoking and smokeless products.
- Vector, focused on the discount market, sells its products under brands such as Grand Prix, Liggett Select, and Pyramid. It has seen its revenue rise on the back of pricing actions.
- Late last year, Vector completed the spinoff of its real estate business – Douglas Elliman Realty (NYSE: DOUG) – dividing itself into two stand-alone companies.
- Our Altria Revenue and Vector Group Revenue dashboards provides more insight into the companies’ sales.
- For both companies, the volume is expected to decline in the long run, given health considerations and government restrictions. However, the revenue for both is expected to trend higher on the back of pricing growth.
- If the U.S. economy were to face a recession and cut in consumer spending, it is likely that Vector would fare better over its peers, given its focus on the lower-end discount cigarette market.
- Looking forward, Vector’s revenue is expected to grow faster than Altria’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 3.2% for Vector, compared to a 1.6% CAGR for Altria, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Vector Is More Profitable
- Altria’s operating margin of 17.6% over the last twelve months is lower than 27.7% for Vector.
- This compares with 3.1% and 34.4% figures seen in 2019, before the pandemic, respectively.
- Altria’s free cash flow margin of 32.5% is better than 19.0% for Vector.
- Our Altria Operating Income and Vector Group Operating Income dashboards have more details.
- Looking at financial risk, Altria’s 35.8% debt as a percentage of equity is much lower than 96.8% for Vector, while its 7.0% cash as a percentage of assets is lower than 32.6% for the latter, implying that Altria has a better debt position, but Vector has more cash cushion.
3. The Net of It All
- We see that Vector has demonstrated better revenue growth, is more profitable, has more cash cushion, and is available at a relatively lower valuation. On the other hand, Altria has a better debt position. Going by historical performance, Vector appears to be a better bet.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Vector is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for Altria and Vector over the next three years and points to an expected return of 14% for Vector over this period vs. a 5% expected return for Altria stock, implying that investors are better off buying VGR over MO, based on Trefis Machine Learning analysis – Altria vs. Vector Group – which also provides more details on how we arrive at these numbers.
While VGR stock may outperform MO, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Philip Morris vs. Coca-Cola.
|S&P 500 Return||6%||-20%||69%|
|Trefis Multi-Strategy Portfolio||8%||-21%||214%|
 Month-to-date and year-to-date as of 10/5/2022
 Cumulative total returns since the end of 2016
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