Investors should look at valuation multiples when deciding whether to enter or exit a stock. Valuation multiples are driven by perceived growth, risks and uncertainties, and investors’ willingness to pay.
There are various multiples available for assessing the valuation of a stock. For this analysis of Altria Group (MO), we’ve chosen the PE (price-to-earnings) multiple due to the high visibility of the company’s earnings. The forward PE multiple is calculated by dividing the company’s current share price by its forecast EPS (earnings per share) for the next 12 months.
Altria’s PE multiple
Since the announcement of Altria’s 3Q16 earnings on October 27, 2016, its PE multiple has moved up from 19.6x to 20.7x. The company, along with Philip Morris International (PM), has submitted a modified risk tobacco product application to the FDA for its IQOS, an electronically heated tobacco product. If approved, Altria would receive exclusive rights to market the product in the United States. This news, along with better-than-expected 3Q16 earnings, appears to have increased investors’ confidence, boosting Altria’s stock price and PE multiple. On January 18, 2017, peers Philip Morris and Reynolds American (RAI) were trading at PE multiples of 19.6x and 22.8x, respectively.
Altria has been investing in Nu Mark to develop a portfolio of products. The most recent introduction has been the MarkTen XL product range. If these products fail to generate the desired sales, the rise in expenses could put pressure on the company’s margins, lowering Altria’s EPS (earnings per share).
For the next four quarters, analysts expect the company to post EPS growth of 5.6%. Altria’s current share price may have factored in this EPS growth. If the company’s results come in lower, the stock could face selling pressure, which could bring the PE multiple down. You can mitigate such company-specific risks by investing in funds such as the Consumer Staples Select Sector SPDR ETF (XLP), which has a 17.6% exposure to cigarette and tobacco companies. Next, we’ll look at what analysts recommend for Altria before its 4Q16 earnings announcement.