Can Altria Group Continue to Outperform?

With shares of Altria Group Inc. (NYSE:MO) trading around $33.18, is MO an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

E = Equity to Debt Ratio is Far from ZeroPiggy Bank IOU

Altria’s debt-to-equity ratio of 3.59 looks pretty bad any way you look at it. One of its major competitors, Reynolds American Inc. (NYSE:RAI), clocks in with a debt-to-equity ratio of just 0.67.

We also need to consider total debt and total cash on hand, which for Altria is $13.88 billion in debt, and $2.19 billion in cash. This compares to Reynolds American, which has $3.86 billion in debt and $1.24 billion in cash.

T = Technicals on the Stock Chart are Strong

The stock price was recently 0.39 percent above its 20-day simple moving average, or SMA; 1.31 percent above its 50-day SMA; and 1.97 percent above its 200-day SMA.

Since the beginning of 2012 the stock price has been in a fairly pronounced upward trend, rising 16.27 percent this year-to-date and 20.54 percent year-over-year.

As a benchmark, the S&P 500 has risen 12.30 percent year to date, and 16.54 percent year over year. For comparison, shares of Lorillard, Inc. (NYSE:LO) are up 5.6 percent this year to date, and shares of Reynolds American are up 4.37 percent this year to date.

Not only did Altria’s performance on the stock chart outshine its competition, but its competition didn’t outpace the benchmark.

E = Earnings Are Solid

Altria has increased its revenue in three out of the last four years, falling off pace with a 1.62 dip in 2011. The company posted an average growth rate of about 3.6 percent in the preceding three years.

Fiscal Year 2007 2008 2009 2010 2011
Revenue ($) in millions 18,660 19,360 23,560 24,360 23,800
Diluted EPS ($) 4.62 2.36 1.54 1.87 1.64

 

Annual earnings tell a different story, with growth in just one year. EPS grew 21.33 percent in 2010, but declined an average of 18.6 percent over the last four years.

Quarter-to-quarter revenue looks like a game of “red light, green light” beginning with 0.42 percent growth in the December quarter. After that, revenues shrank 8.1 percent, grew 14.6 percent, and shrank 2.5 percent in the most recent quarter.

Quarter Sep. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012
Revenue ($) in millions 6,108 6,129 5,647 6,487 6,242
Diluted EPS ($) 0.57 0.41 0.48 0.60 0.32

 

The quarterly EPS history is also spotty, with a 29 percent drop in the December quarter, followed by two periods of moderate growth, and then a 46.3 percent drop in the December quarter.

Benson CigarettesE = Excellent Mediocre Performance Relative to Peers

Many investors favor return on equity as a key metric to diagnose how well a company is performing. Altria’s operational performance blows its competitors out of the water with an ROE of 94.15 percent. Reynolds American compares with an ROE of 24.35 percent.

Operating margins are also critical for stock evaluation, but on this metric Altria falls behind its competition. Altria has an operating margin of 24.36 percent, which compares to Lorillard at 28.86 percent, and Reynolds American at 31.11 percent.

T = Trends Indicate an Uncertain Future

On June 22, 2009, President Barack Obama signed the Family Smoking Prevention and Tobacco Control Act, a federal statute that gave the Food and Drug Administration the power to regulate the tobacco industry. To say the least, this act put up a roadblock.

Data obtained by the Associated Press found that since the act was signed, over 3,500 product applications had been submitted by the tobacco industry and not one of them had been ruled on. Regardless, a vast majority of them are being sold and not many people are up in a huff about it. The AP reports: “A grandfather clause in the law allows products introduced between February 2007 and March 2011 that are similar to those previously on the market to be sold while under review.”

The bill was signed on the back of a torrent of now well-known statistics about the dangers of smoking: an estimated 443,000 deaths per year as a result of smoking, coming out of 19 percent of the adult U.S. population that smokes, and 16 percent of high school students that do…

There has been a tremendous anti-smoking campaign in the United states for years, at the percent of adults who smoke in the U.S. has dropped fairly consistently since 1965, when the Center for Disease Control started collecting data. The rate in 2011 was 18.9 percent among adults, and 18.1 percent of high school students, and is projected to keep dropping slowly.

Conclusion

Analysts keep a pretty unanimous “Hold” rating on the stock and a mean price target of $36.10. For an investor who has been in and out of Altria in the past, or who has held it through the years, the stock has likely been kind to them. One attractive quality is its forward annual dividend yield of 5.3 percent, for a rate of $1.76.

That being said, social and legal trends are producing headwinds for the industry. Altria shows its shareholders some serious love, but it will have to diversify itself if it wants to survive in the long-run. And, on that note, the company has, with a nearly 29 percent stake in the UK-based brewing company SABMiller and a number of wine brands under control.

Because of this, and the metrics above, Altria looks like it will remain a long-term OUTPERFORM.

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