Altria Stock Sees Significant Gains Amid Changing Market Dynamics

The stock price of Altria (NYSE: MO) has risen around 15% in a month, mainly due to better-than-expected quarterly performance attributed to growth in its oral tobacco products. When viewed over a longer timeframe, Altria’s shares have surged nearly 50%, going from $38 in early 2022 to approximately $56 now. This increase can be explained by:

1. a 9% rise in the company’s adjusted earnings from $4.62 in 2021 to $5.02 now; and,
2. a 37% rise in the company’s trailing P/E ratio from 8x to 11x during this period.

Let’s explore these factors further.

Key Drivers of Altria’s Earnings Growth

Altria operates primarily in the U.S. tobacco market. In 2021, it sold its wine business for $1.2 billion to concentrate on smoking and smokeless products. Despite facing inflationary pressures, which have led to a decline in cigarette sales, the company has managed to maintain its revenue stream. For reference, the volume of smokeable products dropped 25% from 93.8 billion sticks in 2021 to 70.1 billion sticks over the past twelve months. Consequently, Altria’s revenues fell by 4%, declining from $21.1 billion to $20.3 billion within the same period. The volume drop did not significantly impact revenue because of strong pricing growth in recent years. Additionally, Altria’s new smoke-free products, including NJOY and on!, continue to contribute positively to its portfolio.

Even with recent revenue declines, Altria’s operating margin improved from 54.8% in 2021 to 56.4% today. The company has also executed nearly $8 billion in share repurchases since 2021, resulting in a 6% reduction in its total shares outstanding. As a result, earnings per share rose to $5.02 on an adjusted basis, up from $4.62 in 2021.

Reasons Behind the Rising Valuation Multiple

Investors have recently shown enthusiasm for Altria stock, as the reduction in cigarette volume has been offset by price increases. Moreover, sales of oral tobacco products have positively influenced the company. Shifts in consumer behavior due to inflation have led some customers to opt for cheaper brands. For context, Marlboro’s share of total cigarettes decreased from 42.9% in 2021 to 41.9% now. However, as the U.S. Federal Reserve takes measures to address inflation, improvements in consumer sentiment could help stabilize cigarette sales in the coming years.

Additionally, Altria’s decision to reduce its stake in Anheuser-Busch InBev and utilize the proceeds for stock buybacks earlier this year has also benefited its stock performance.

Assessing MO’s Potential for Future Growth

While Altria’s stock performance has been quite volatile over various years, annual returns have shown more stability compared to the S&P 500. The stock delivered returns of 24% in 2021, 4% in 2022, -4% in 2023, and an impressive 48% so far in 2024. This contrasts with the performance of the Trefis High Quality (HQ) Portfolio, which includes 30 stocks and has outperformed the S&P 500 every year during the same period.

Looking at the current uncertain macroeconomic environment concerning potential rate cuts and geopolitical tensions, Altria may find itself in a familiar position as observed in 2021 and 2023—potentially underperforming the S&P over the next year. When evaluating its valuation, MO stock appears fully priced. Our estimate places Altria’s Valuation at $48 per share, approximately 15% below its current valuation of around $56. This forecast is grounded in a 9x P/E multiple for MO, paired with expected earnings of $5.13 on an adjusted per-share basis for the full year of 2024. This valuation aligns with the company’s average forward P/E ratio over the past three years.

Investors should remain cautious, as three key factors—tariffs, deportations, and low taxes—could hinder the Federal Reserve’s ability to combat future inflation. Our analysis in Could S&P Crash More Than 40%? outlines these risks further. If the Fed pauses rate cuts amid rising inflation, it could further dampen consumer sentiment, adversely impacting Altria’s performance.

Though MO stock seems fully valued, reviewing Altria’s peers can provide valuable insights and comparisons across the industry. Explore more in our Peer Comparisons.

[1] Returns as of 11/21/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.