Altria May Bounce Higher From Here (NYSE:MO)

Altria May Bounce Higher From Here (NYSE:MO)

Despite reaffirming its full-year guidance, investors dumped shares of Altria (MO) earlier last month. Selling pressure finally eased toward the end of September as investors bet the worst is behind the consumer defensive tobacco giant.

Prodding the Defense of Big Tobacco: An Analysis of Altria Group Inc. (Part 2 of 2)

Investors may point to the 8.69% dividend yield as a cushion to offset the quarterly drop (-5.75%). Still, after a year-to-date loss of 26.54%, shareholders have a long way to go. Why is the tobacco firm heavily discounted, as UBS describes it, and will the rebound continue from here?



Altria Stock Underperforms

Investors punished Altria stock the most this year, compared to British Tobacco (BTI) and Phillip Morris (PM). The anticipation of regulatory restrictions against Altria’s JUUL investment adds more uncertainties that the other tobacco firms lack.

Chart courtesy of Stock Rover

On September 3, Altria said that JUUL significantly cut its global workforce and will consider exiting from poor-performing markets. It cited potentially leaving the EMEA (Europe, Middle East, and Africa) and APAC (Asia-Pacific) regions. Altria will assess the approach, which suggests that it will evaluate the long-term reduction of growth. It also warned that this may result in a revaluation of the value of its JUUL investment.

If that happens, Altria may take another non-cash writedown in its upcoming quarterly earnings report.

Cronos a Drag on Altria Stock

Altria’s ill-timed investment in Cronos (OTC:CRON), worth billions, is or will become mostly a write-off. The investment did nothing but pump Cronos stock to a January 2019 high at first. Months after the deal, the stock price headed south:

Chart courtesy of Stock Rover

In the second quarter, Cronos posted revenue growing 28.6% year on year, but this amounted to just $9.9 million. The company lost $34.8 million, while gross profits fell. Marketing and research & development costs rose.

Altria’s new CEO, hired in April, will put an end to the expensive acquisitions. Unfortunately, the new CEO, Billy Gifford, will have to clean up the mess. Between May and September, investors took Altria stock back to ~$45.00 as they scurried to buy stocks on sale.

September’s mild selling of Apple (AAPL) and Tesla (TSLA) pulled technology stocks down by 9.3%. The panic spread to defensive investments and hurt Altria’s performance.

Valuation

Altria scores an A- on value, below that of BTI stock but better than that of PM shares.

Data Courtesy of SA Premium

If we assume U.S.-based investors would rather hold a domestic firm, then Altria has a wide undervaluation compared to Phillip Morris:

The low P/E is not a positive catalyst for the stock. It only illustrates how out of favor it is for value investors. Altria re-affirmed its 2020 full-year earnings per share range of $4.21-4.38. At a recent close of $39.60, MO stock trades at a single-digit forward P/E.

Looking under the hood, long-term debt more than doubled, from $11.898 billion to $27.042 billion last year:

During the market decline in the last month, heavily indebted firms like Teva Pharmaceutical (TEVA), Bausch Health Companies (BHC), and AT&T (T) all faced heavy selling pressure. Still, AT&T has enough cash flow to pay down its debt and cover dividend payments that yield 7.24%. And Altria does, too. That will encourage income investors to buy the dips in both AT&T and Altria.

Near-term Risks

The coronavirus pandemic delayed the litigation against JUUL. If the courts resume their schedule, negative news coverage on JUUL may pull Altria shares lower. Conversely, if it defends itself successfully, the company will resume its uptrend.

A general decline in stock markets ahead of the elections is a macro headwind that may hurt Altria’s recent rebound. This time, income investors may accumulate shares more aggressively on the dip as the yield shields any paper losses.

Fair Value and Your Takeaway

Investors may assume the following metrics in a 5-year discounted cash flow growth exit model:

Metrics

Range

Conclusion

Discount Rate

9.0% – 8.0%

8.50%

Perpetuity Growth Rate

1.3% – 2.0%

1.80%

Fair Value

$49.44 – $62.28

$55.86

Model courtesy of Finbox

Revenue grows may look something like this:

(USD in millions)

Input Projections

Fiscal Years Ending

19-Dec

20-Dec

21-Dec

22-Dec

23-Dec

24-Dec

Revenue

19,796

20,454

20,926

21,345

21,771

22,207

% Growth

0.90%

3.30%

2.30%

2.00%

2.00%

2.00%

EBITDA

11,036

10,227

10,044

10,032

10,233

9,993

% of Revenue

55.70%

50.00%

48.00%

47.00%

47.00%

45.00%

Readers may change the assumptions here. In the above scenario, Altria is substantially undervalued, with a fair value of almost $56.00. Investors also get an 8.69% dividend yield cushion. In the near term, the stock could rally back to ~45.00. A strong quarterly earnings report later this month may send the stock above that level.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


Originally published on Seeking Alpha

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