Altria Group Inc.’s market valuation
Altria Group (MO) is a pioneer in manufacturing and selling tobacco products and wine. Altria and Reynolds American (RAI) are currently trading at higher valuations relative to the S&P 500 Index (SPY) (IVV) (VOO) and the Dow Jones Industrial Average (DIA).
Altria is trading at a PE (price-to-earnings) multiple of 18.5x forward earnings, and Reynolds American is trading at 19.4x forward earnings. In comparison, the S&P 500 Index and the Dow Jones Industrial Average are trading at forward PE multiples of 16.8x and 15.1x, respectively. All valuations are as of September 4, 2015.
Growth and peer valuation
Other companies like British American Tobacco (BTI) and Philip Morris International (PM) are trading at lower PE multiples of 16.0x and 17.5x, respectively, in comparison to Altria. Imperial Tobacco Group (ITYBY) has a valuation of 14.9x forward earning, the lowest amongst all tobacco companies.
Reynolds American’s valuations are higher than Altria’s, as its stock price spiked by 16.2% from June 12, after it completed the acquisition of Lorillard.
Markets generally value companies at a higher multiples if growth expectations are higher. This has proven true for Altria. The company’s revenue grew at a CAGR (compound annual growth rate) of 2.4% over the past five years—higher than peers Philip Morris International and Reynolds American, whose revenues grew at CAGRs of -0.6% and 1.2%, respectively.
To learn more about Philip Morris’s valuation, please read “Philip Morris’s High Market Valuation Versus S&P 500.”
The Final Tobacco Marketing Rule has banned the use of color and graphics in tobacco products labeling and advertising. This ban is enforceable by the FDA (Food and Drug Administration) and makes it significantly more difficult for any tobacco company to establish stable revenue growth.
However, the addictive nature of cigarettes and Altria’s steps to expand distribution and shipment volume should help sustain the company’s dominance in the US market.
In the next part of this series, we’ll look at Altria Group’s strengths and opportunities.