Altria: The Defensive Stock With More Than 20% Potential Gain

We believe there may be a good opportunity with Altria stock (NYSE: MO) at the present time. MO trades at $39 currently and is in fact down 16% so far this year. It traded at a pre-Covid high of close to $44 in February, and is still 11% below that level now. MO stock has gained 33% from the low of $29 seen in March 2020, less than the S&P 500 which is up 50% from its March lows. MO stock has underperformed the broader market because the drop in the stock when the crisis hit was less than the market, as it belongs to the defensive sector of tobacco. That said, with the lockdowns being lifted, supply constraints are likely to ease leading to higher volume sold. Also, the expectations of rising sale of IQOS e-cigarettes in the US is likely to boost revenues and margins. This could take the stock to $48 - well beyond its February peak – reflecting a potential upside of more than 20%. Our conclusion is based on our detailed comparative analysis on Altria stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 50% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how MO stock and the broader market performed during the 2007-08 crisis

Timeline for 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 - 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

MO vs S&P 500 Performance Over 2007-08 Financial Crisis

MO stock declined from levels of close to $11 in September 2007 (pre-crisis peak) to levels of little over $8 in March 2009 (as the markets bottomed out), implying MO stock lost 23% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $11 in early 2010, rising by 34% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

MO Fundamentals Over Recent Years Have Been Strong

Altria revenues saw a marginal decline from $25.4 billion in 2015 to $25.1 billion in 2019, due to lower cigarette volume sold. Along with lower revenues, margins also declined over recent years with EPS decreasing from $7.28 in 2016 to $3.69 in 2018. MO reported losses in 2019 due to a large impairment charge. MO’s Q2 2020 revenues saw a 4% y-o-y rise, which was mainly due to higher prices charged for cigarettes even though volume sold dropped. Earnings came in at $1.88/share as against $1.66/share in the year-ago period.

Does MO Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

MO’s total debt more than doubled from $14 billion in 2016 to $29 billion at the end of Q2 2020, while its total cash decreased from $4.6 billion to $2.1 billion over the same period. At the same time, the company’s cash from operations more than doubled from $3.8 billion to $7.8 billion. Though debt has increased due to recent acquisitions, the company’s increased CFO generation is likely to help MO weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns - no panic anymore despite a steady increase in the number of cases
• July-September 2020: Poor Q2 results, but continued improvement in demand and a decline in the number of new Covid-19 cases in the U.S. and progress with vaccine development buoy expectations

Going by historical performance and in view of only a modest rally since March 2020, we believe Altria Group, Inc stock has the potential for more gains once fears surrounding the Covid outbreak are put to rest. Additionally, the recent acquisitions along with the sale of IQOS in the US is likely to drive revenue and earnings in 2021. With investor focus having shifted to 2021 numbers, as per Trefis, Altria’s valuation works out to $48 per share, reflecting an upside of more than 20% from the current market price.

For better insight into the tobacco space, see how Altria’s stock performance compares with Philip Morris.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

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