Is Altria a Good Investment?

Altria Group, Inc. (NYSE:MO) spun off its international operations in 2008, which now trades as a separate company, Philip Morris International Inc. (NYSE:PM). Altria focuses on the U.S. market, while Philip Morris is focused on international markets. Although Altria is considered the more stable company, with less growth opportunities, it has identified various opportunities within the U.S. that extend beyond tobacco. This includes its almost 30% stake in the brewing company, SAB Miller.

Although the cigarette industry as a whole is expected to see mid-single decline over the next few years, Altria is expected to see a revenue increase of 5% in 2012. This is driven by a diverse product mix and initiatives for restructuring manufacturing, where they expect to save $400 million by the end of 2013.

David Winters

Altria is the U.S. leader in cigarette sales market share at 50%, with Reynolds American, Inc. (NYSE:RAI) coming in at second around 30%. Reynolds is expected to have a down year, with revenues down 1% from 2011. The company is managing to keep revenues relatively in line due growth in its top brands, Camel and American Spirits, but other lower margin brands continue to struggle. Part of what gives Altria an advantage over Reynolds, is that Reynolds’ top brands are susceptible to trade down.

The third big player in the U.S. cigarette industry is Lorillard Inc. (NYSE:LO), with around 10% of the market. Lorillard saw sales up 10% in 2011 and expects sales up 4% in 2012 on market share gains thanks to the company’s top brand Newport. However, if the FDA’s ban of menthol ever came to fruition, it would be detrimental to Lorillard.

British American Tobacco PLC (NYSE:BTI) missed first half 2012 sales on declining organic volumes. Organic volume was down 0.6% for the first half, versus being up 0.7% in 1Q. The company is seeing pressure from international markets, including slowing demand from Italy, Turkey, Egypt, Japan and Brazil. The decline in these countries overpowered the modest volume growth in Russia and Asia. British American was powered by its Lucky Strike brand in the first half of the year, with volume up 19%. The company is also expected to grow EPS 8% this year despite its exposure to a weak European economy. We believe that even though the company is expected to have positive growth next year it still trades too rich on a valuation basis.

The tobacco companies appear to trade in a tight range on a P/E and P/S basis, with British American being the clear outlier, trading above its peers. Altria and Lorillard are in a tight race for being the most undervalued company in the tobacco industry.

 

P/E P/S Dividend Yield (%)
Altria 15 2.9 5.3
Reynolds 18 2.8 5.5
Lorillard 14 3.4 5.4
Philip Morris 18 2.0 3.7
British American 20 4.0 4.1

 

The fund interest in Altria includes five funds that had over 4% of their 2Q 13F portfolio invested. Wintergreen Advisors had over 13% of its 13F in the company, while Adage Capital, Jim Simons and Cliff Asness also owned at least 1 million shares at the end of 2Q. Also worth noting is that Wintergreen Advisors is the top fund owner in Reynolds American, with 9% of their 13F invested in the company. Wintergreen also shows up as the number two fund owner by shares in Philip Morris, with 11% of their 13F invested in the company—see all of Wintergreen’s holdings here. We believe that Altria has made key strides to maintain its position as the leader in the cigarette market, but that it also appears to be positioned well to benefit from increased demand for smokeless products.

Even though the U.S. cigarette market has been in decline since 2009, Altria’s acquisition of the smokeless tobacco company UST Inc. gives it another competitive advantage. Altria’s revenue from smokeless products was up 5.4% in 2011, with smokeless products operating income up 7.1%.  As well, smokeless products are a higher margin item for the company. The company is focused on expanding its product mix to help mitigate the constant ligation that the tobacco industry faces, and we believe Altria is better positioned to do so relative to its peers.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!