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How Altria’s Valuation Multiple Stacks Up against Peers

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Updated

Valuation multiple

We have considered the forward PE (price-to-earnings) multiple for this analysis due to high visibility in Altria Group’s (MO) earnings. The forward PE multiple is calculated by dividing Altria’s stock price from analysts’ earnings estimate for the next four quarters.

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Altria’s PE multiple

Although 1Q17 earnings were lower than expected, the announcement that the US Food and Drug Administration (or FDA) has started a substantive science review on Philip Morris International’s (PM) modified risk tobacco product (or MRTP) application has boosted Altria’s stock price and its forward PE multiple. In December 2016, Philip Morris together with Altria Group applied for an MRTP for its electronically heated tobacco product. As of June 9, 2017, Altria was trading at a forward PE multiple of 22.2x compared to 20.9x before the announcement of 1Q17 earnings.

On the same day, peers Philip Morris International (PM) and Reynolds American (RAI) were trading at PE multiples of 23.4x and 25.0x, respectively.

Growth prospects

To drive its sales, Altria introduced three new flavors of Mark Ten in April 2017. The company also acquired Nat Sherman, a super-premium cigarette and premium cigar manufacturer in January 2017. If these initiatives fail to generate expected sales, the increased expenses could put pressure on Altria’s margins, thus lowering its earnings.

For the next four quarters, analysts are expecting Altria to post earnings growth of 10.9%. If the company posts earnings lower than analysts’ estimates, the selling pressure could lower the company’s stock price and its forward PE multiple.

You can mitigate these company-specific risks by investing in the First Trust Morningstar Dividend Leaders Index Fund (FDL), which invests 12.2% of its holdings in cigarette and tobacco companies.

Next, we’ll look at analysts’ recommendations and target prices.

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