I Love You, Altria Group!

With shares of Altria Group Inc. (NYSE:MO) trading at around $33.70, is MO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

CigaretteC = Catalyst for the Stock’s Movement

If you have owned shares in Altria Group over the past three years, then you can relate to the title. You have enjoyed a gain over 100 percent over a three-year time frame while also receiving healthy dividend payments. Life doesn’t get much better when it comes to investing. However, while past results might be a good indicator for the odds of future success, there are no guarantees.

Altria recently reported Q4 results. EPS came in at $0.55, which was a 34.1 percent increase year-over-year. Atria has displayed pricing power and continued to gain market share. Prices for all cigarette brands were raised by 6 cents per pack. There has also been a higher equity investment in SABMiller.

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FY2012 EPS came in at $2.06, which was a 25.6 percent increase over last year. Guidance for FY2013 was $2.34 to $2.40. We will focus on guidance in the Trends section as they strongly relate to one another for this story.

Altria has made significant progress with its cost reduction program with a reduced headcount, consolidation of facilities, and improved business processes. The goal of $400 million in annualized savings seems attainable.

Let’s take a look at some important numbers for Altria Group prior to forming an opinion on the likelihood of the stock’s direction…

E = Equity to Debt Ratio Is Weak  

The debt-to-equity ratio is weak and indicates that this company has poor debt management. The balance sheet is also in poor condition. That said, Altria Group is well aware of its debt issues and is working hard to rectify the problem.     

Debt-To-Equity

Cash

Long-Term Debt

MO

3.59

$2.19 Billion

$13.88 Million

RAI

0.56

$1.24 Billion

$3.19 Billion

LO

N/A

$1.72 Billion

$3.12 Billion

 

T = Technicals on the Stock Chart Are Strong  

Atria Group has outperformed Reynolds American Inc. (NYSE:RAI) and Lorillard (NYSE:LO) for every time frame listed below.

1 Month

Year-To-Date

1 Year

3 Year

MO

8.36%

7.16%

25.05%

102.30%

RAI

8.09%

6.94%

18.24%

98.69%

LO

1.77%

0.62%

12.53%

81.30%

 

At $33.70, Altria Group is currently trading above all its averages.   

50-Day SMA

32.76

100-Day SMA

32.91

200-Day SMA

33.28

 

E = Earnings Have Been Inconsistent     

Earnings and revenue have both been inconsistent, but Altria Group always remains profitable.

2007

2008

2009

2010

2011

Revenue ($)in billions

18.66

19.36

23.56

24.36

23.80

Diluted EPS ($)

4.62

2.36

1.54

1.87

1.64

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

6.11

6.13

5.65

6.49

6.24

Diluted EPS ($)

0.57

0.41

0.48

0.60

0.32

 

T = Trends Might Support the Industry

There has no doubt been a challenging external environment. But up until this point in time, these challenging conditions haven’t had much impact on Altria Group. This company gained market share in cigarettes, cigars, and smokeless tobacco in 2012. Premium tobacco brands have performed especially well. Altria Group’s outlook is cautious for three reasons: 1) adult consumers face the end of a payroll tax holiday, 2) high unemployment, and 3) state budget shortfalls make tobacco products prime targets for tax increases.

Conclusion

Should you still love Altria Group? On the positive side, margins are strong, cash flow is good, and a 5.30 percent yield is enticing. More share buybacks are also possible. On the negative side, debt management is poor and there might be some challenging conditions ahead.

The positives outweigh the negatives, and Altria Group has a history of making shareholders happy. Altria Group is an OUTPERFORM.

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