As of March 6, Altria Group (NYSE:MO) was trading at $42.15—a fall of 15.9% since the company reported its earnings for the fourth quarter of 2020 on January 30. In the fourth quarter, the company posted an adjusted EPS that was in line with analysts’ expectations. However, the EPS missed analysts’ revenue expectations. Also, Altria wrote down $4.1 billion of its investments in JUUL due to an increase in its pending legal cases. The company’s management lowered its EPS growth guidance to 4%–7% from 2020 to 2022 from the earlier guidance of 5%–8%. Along with these factors, weakness in the broader equity market due to the coronavirus outbreak dragged the stock down.
Also, Altria trades 27.2% lower than its 52-week high of $57.88 and at a 9.3% premium to its 52-week low of $38.57. So, has Altria stock bottomed out? First, we’ll look at analysts’ expectations for Altria in 2020.
Analysts’ revenue expectations for Altria
For 2020, analysts expect Altria to report revenue of $20.22 billion—a rise of 2.2% from $19.80 billion in 2019. We expect a favorable pricing variance, growth in iQOS sales, and expansion of ON! Oral nicotine pouches to drive the company’s revenue. However, the company’s management expects the total domestic cigarette industry volume to fall by 4%–6% in 2020. The proposed plan to increase the legal age for purchasing tobacco products to 21 years, higher tobacco product prices, and a shift in customers’ preferences away from combustible tobacco products could lead to a fall in the total domestic cigarette industry’s volume.
Altria has commercialized Philip Morris’s (NYSE:PM) iQOS in Atlanta and Richmond. The company has expanded the distribution of Heatsticks to over 500 retail stores across both cities. During the fourth-quarter earnings call, management stated that they’re gathering information from lead markets to expand the company’s commercialization plans to other markets. Meanwhile, Philip Morris’s MRTP (Modified Risk Tobacco Product) application for iQOS is still pending. Also, the company plans to submit a supplemental PMTA (Premarket Tobacco Product Applications) application for its iQOS 3. iQOS offers a more premium and modern design product with a rapid charge battery.
Altria plans to submit a PMTA application for its ON! Oral nicotine pouches by May 2020. The company is building manufacturing facilities at the Richmond manufacturing center, which could start production this quarter. All of these initiatives could drive the company’s revenue.
EPS to rise in 2020
Following its fourth-quarter earnings, Altria’s management lowered its EPS growth guidance for 2020 to 2022. For 2020, management expects its EPS to be $4.39–$4.51. Meanwhile, analysts expect Altria to report an adjusted EPS of $4.43 in 2020—an increase of 4.9% from $4.22 in 2019. The revenue growth, improvement in the EBITDA margin, and share repurchases could drive the company’s EPS. For 2020, analysts expect the company’s EBITDA margin to increase from 54.7% in 2019 to 55.9%. The growth in higher-margin iQOS, the company’s cost reduction initiatives, and efficient promotional spending could drive its EBITDA.
Moving to share repurchases, Altria repurchased approximately $500 million worth of shares in 2019. By the end of 2019, the company had approximately $500 million available under its share repurchase program. The share repurchases could lower the number of shares outstanding and drive the company’s EPS.
Altria’s dividend yield looks attractive
On February 27, Altria’s board announced quarterly dividends of $0.84 at an annualized payout of $3.36 per share. The company will pay dividends on April 30 to shareholders on record as of March 25. As of March 6, the company’s dividend yield was 7.8%, while the stock was trading at $42.15. On the same day, Philip Morris’s dividend yield was 5.33%.
After Altria reported its fourth-quarter earnings, Jefferies and Deutsche Bank lowered their target prices. Jefferies cut its target price from $48 to $45, while Deutsche Bank lowered its target price from $59 to $56. However, not all of the analysts are bearish on Altria. On January 31, Piper Sandler upgraded the stock to “overweight” and raised its target price from $52 to $57.
Despite the recent fall, Wall Street is bullish on Altria. Among the 15 analysts that cover the stock, eight recommend a “buy,” while seven recommend a “hold.” None of the analysts recommend a “sell.” As of March 6, analysts’ consensus target price was $54.68, which represents a return potential of 29.7%.
As of March 6, Altria was trading at a forward PE ratio of 9.42x compared to 11.3x before reporting its fourth-quarter earnings. The decline in Altria’s stock price brought its valuation multiple down. On the same day, Philip Morris was trading at 15.4x.
Meanwhile, Altria is trading at 9.52x analysts’ 2020 EPS expectation of $4.43 and at 9.0x analysts’ 2021 EPS expectation of $4.68. They expect the company’s EPS to grow 4.9% this year and 5.7% next year.
My take on Altria
Although Altria’s dividend yield and its valuation multiple look attractive, we expect the stock to be under pressure due to its investments in JUUL and Cronos Group (NASDAQ:CRON). With reports of vaping-related diseases and vaping reaching endemic proportions among young people, many states have banned flavored or all e-vapor products. Also, JUUL has several legal cases pending. Altria’s management expects the cases against JUUL to rise. The uncertainties surrounding JUUL could put pressure on Altria. Cronos Group, the company’s other investment, has lost 22% of its stock price since the beginning of this year. So, I expect Altria to underperform its peer.