Altria Group (NYSE:MO) is a prominent American corporation in the tobacco industry, based in Richmond. With an impressive portfolio that includes well-known brands like Marlboro and Black & Mild, Altria has emerged as one of the leaders in the market.
The demand for Altria’s cigars and oral tobacco products has been on the rise, partially offsetting the impact of the company’s troubled investment in Juul Labs. While Altria’s acquisition of a 35% stake in Juul initially seemed promising, increased scrutiny and regulatory restrictions on e-cigarette products led to a decline in Juul’s market dominance. Notably, the FDA banned the sale of Juul’s vaping devices and capsules between 2020 and 2022.
However, the legal battles between Altria Group and Juul are far from over. In August 2023, Altria’s subsidiary NJOY filed a complaint against Juul with the United States International Trade Commission, seeking to restrict the import and sale of e-cigarettes. The ongoing feud between the two e-cigarette companies is expected to continue.
Despite the uncertainties surrounding NJOY products and the decreasing number of tobacco users, Altria Group has a strong reputation among conservative investors. The company has consistently increased its dividend payments for 54 years, making it an attractive investment option for those seeking to offset the negative impact of rising inflation.
The confidence in Altria’s future is further reinforced by its top five shareholders, including prominent financial giants Capital World Investors, Vanguard Group, BlackRock, State Street, and Charles Schwab Investment Management. Their significant ownership stakes suggest faith in the company’s prospects, despite the stringent regulations governing the tobacco industry.
While Altria’s share price has experienced a slight decline of around 7%, this is comparatively better than the performance of its competitors such as Imperial Brands (OTCQX:IMBBY) and British American Tobacco (BTI), which have seen even greater challenges this year.
As we initiate coverage of Altria Group, we assign an “outperform” rating for the next 12 months.
Altria Group’s Performance in Q2 2023 and Outlook
During the second quarter of 2023, Altria Group reported revenue of $5.44 billion, marking a 14.3% increase compared to the previous quarter and 1.3% growth year-over-year. Despite this overall sales growth, the company has only exceeded analysts’ revenue estimates in two of the last ten quarters, suggesting potential overestimation by Wall Street in the highly competitive tobacco industry.
In recent years, Altria has faced a decline in demand for smokeable products, resulting in downward pressure on its share price. Cigarette shipment volumes in the second quarter of 2023 decreased by 8.7% compared to the previous year, attributable to intensified competition and a higher rate of Americans switching to e-cigarettes.
However, Altria’s CEO, Billy Gifford, has implemented strategies to mitigate the impact of declining cigarette supply volumes. This includes launching new oral tobacco products and implementing price increases for premium cigarettes.
Looking ahead, Altria Group’s revenue for the third quarter of 2023 is projected to be between $5.29 billion and $5.59 billion, slightly higher than analysts’ expectations. Our model indicates that total revenue will exceed the median value of this range, reaching $5.5 billion. This growth will predominantly result from increased prices for oral tobacco products and a surge in demand for NJOY Ace e-cigarettes, which received FDA approvals in mid-October and late April 2022.
Altria Group’s operating income margin in Q2 2023 was 54.71%, a decrease of 4.69% year-over-year but still remarkably higher than the consumer staples sector’s average.
Our forecast suggests that this financial indicator will reach 56.1% by 2023 and further increase to 57.4% by 2024. This will be aided by lower prices for tobacco products and the expansion of Altria’s product portfolio through the acquisition of NJOY Holdings.
The company’s EPS for the three months ended June 30, 2023, was $1.31, showing a 4% increase compared to the previous year. Altria Group has consistently beaten analysts’ consensus estimates in eight of the last ten quarters, partially due to its successful share repurchase program.
According to Seeking Alpha, Altria’s third-quarter EPS is expected to be between $1.26 and $1.35, matching the consensus estimate for the previous quarter. However, based on our model, we anticipate Altria’s EPS to be slightly higher at $1.31, representing a 2.3% increase from the previous year.
When examining Altria Group’s Non-GAAP P/E ratios, we find that both its trailing twelve months (TTM) P/E of 8.5x and its forward (FWD) P/E of 8.43x are significantly lower than the sector and five-year averages. This suggests that Wall Street undervalues the company’s worth amidst the current surge in AI enthusiasm.
Altria Group’s total debt stood at approximately $27.2 billion at the end of the second quarter of 2023, experiencing a slight decrease from the previous year. With recent growth in EBITDA, the company’s total debt/EBITDA ratio remains stable at 2.22x.
Given the expansion of Altria’s tobacco product portfolio, high gross and EBIT margins, and a relatively low total debt/EBITDA ratio, the repayment of senior notes denominated in US dollars and euros, maturing between 2024 and 2061, should not pose significant challenges.
Altria Group is a leading American corporation in the tobacco industry, headquartered in Richmond. Despite facing temporary revenue slowdowns and challenges, particularly from increased competition, the company’s acquisition of Njoy Holdings and its consistent dividend growth for over five decades position it favorably for future success.
With an exceptional dividend yield exceeding 9% and ongoing share repurchases of over $500 million, Altria Group’s prospects appear stronger than market pessimism suggests. Furthermore, the confidence displayed by major financial institutions, including Capital World Investors, Vanguard Group, BlackRock, State Street, and Charles Schwab Investment Management, further bolsters the company’s potential.
Based on our analysis, we initiate coverage of Altria Group with an “outperform” rating for the next 12 months.