Valuation multiples help investors decide whether to enter or exit a stock. They are driven by investors’ willingness to pay, growth prospects, risks, and uncertainties.
Of the various available valuation multiples, we have chosen the forward PE (price-to-earnings) multiple, given the high visibility in Altria Group’s (MO) earnings. The forward PE multiple is calculated by dividing a company’s current stock price by its projected EPS for the next four quarters.
Altria’s PE multiple
The better-than-expected 4Q16 earnings and the expansion of its Nu-Mark products have helped Altria meet the growing needs of its customers and appear to have increased investor confidence, leading to a rise in Altria’s stock price and its PE multiple.
As of April 25, 2017, Altria was trading at a PE multiple of 21.5x, as compared to 21.4x before the announcement of its 4Q16 earnings. On the same day, Altria’s peers, Philip Morris International (PM) and Reynolds American (RAI) were trading at PE multiples of 22.4x and 24.4x, respectively.
Altria has been investing in the expansion of its Nu-Mark products. If these products fail to generate the expected sales, the increased expenses are expected to put pressure on Altria’s margins, lowering its earnings.
For the next four quarters, analysts are expecting Altria to post EPS growth of 8.6%, which appears to have been factored into Altria’s current stock price. If the company’s earnings come in lower than expected, however, the selling pressure could lower its PE multiple.
Notably, you can mitigate these company specific risks by investing in the First Trust Morningstar Dividend Leaders Index Fund (FDL), which has invested 11.7% of its holdings in cigarette and tobacco companies.
In the next and final part of this series, we’ll look at the analysts’ recommendations and target prices for Altria and its peers.