Morgan Stanley Upgrades Altria Group to ‘Overweight’


Mar. 17 2020, Updated 8:22 a.m. ET

On March 16, Morgan Stanley upgraded Altria Group (NYSE:MO) from “equal weight” to “overweight” with a target price of $49. On January 31, Piper Sandler upgraded the stock to “overweight” and raised its target price to $57. However, on the same day, Deutsche Bank cut its target price from $59 to $56. Meanwhile, Wall Street is bullish on the stock. Among the 15 analysts that follow Altria, nine recommend a “buy,” while six recommend a “hold.” None of the analysts recommend a “sell.” As of Monday, analysts’ consensus target price was $54.75, which represents a 12-month return potential of 43.3%.

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Altria’s stock performance

Amid the global sell-off yesterday due to concerns about the coronavirus outbreak, Altria’s stock price rose to a high of $41.26 following Morgan Stanley’s upgrade. However, weakness in the broader equity market dragged the stock down to close at $38.22. The close represents a fall of 4.6% from the previous day’s closing price. After yesterday’s fall, Altria has lost 23.4% of its stock value. Along with weakness in the broader equity market, the lower EPS growth guidance by Altria’s management led to a fall in the company’s stock price.

Despite the decline, Altria has outperformed the broader equity market. YTD, the S&P 500 Index has fallen by 26.1%, while the Dow Jones Industrial Average has fallen by 29.3%. Philip Morris International (NYSE:PM) has fallen by 18.2% during the same period. Altria and Philip Morris are defensive stocks, which have provided stable earnings and regular dividends.

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Dividend yield

Last month, Altria’s board announced quarterly dividends of $0.84 at an annualized payout of $3.36 per share. The decline in Altria’s stock price has raised its dividend yield. As of Monday, the company was trading at a dividend yield of 9.23%. On the same day, Philip Morris’s dividend yield was 6.48%.

Analysts’ estimates

For 2020, analysts expect Altria’s revenue to rise by 2.2% to $20.22 billion from $19.80 billion in 2019. Favorable pricing, growth in iQOS sales, and the expansion of ON! Oral nicotine pouches could drive the company’s revenue. However, the decline in the cigarette shipment volume could offset some of the gains.

Meanwhile, analysts expect the company to report an adjusted EPS of $4.42 in 2020, which represents a rise of 4.7% from $4.22 in 2019. The revenue growth, improved EBITDA margin, and share repurchases could drive the company’s EPS.

Altria’s valuation multiple

The recent decline in Altria’s stock price has also brought its valuation multiple down. As of Monday, the company was trading at a forward PE ratio of 8.6x compared to 11.2x at the beginning of this year. Also, the company was trading at a discount compared to Philip Morris, which traded at a forward PE ratio of 12.3x.

As of Monday, Altria traded at 8.7x analysts’ 2020 EPS estimate of $4.42 and at 8.2x analysts’ 2021 EPS estimate of $4.68. Analysts expect the company’s EPS to rise by 4.7% in 2020 and 5.8% in 2021. I think that the company’s attractive valuation multiple and high dividend yield might have prompted Morgan Stanley to upgrade the stock.


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