Is Altria a Good Defensive Play?

With shares of Altria Group Inc. (NYSE:MO) trading at around $35.38, 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:

C = Catalyst for the Stock’s Movement

Altria is an interesting situation. It’s known as a top-tier defensive name, but is that really the case? Is there a better option? Let’s first take a look at the positives for Altria before answering this question:

  • 4.90 percent yield
  • Strong margins
  • Exceptional ROE
  • Consistent profits
  • Sells an addictive product

That’s a short yet sweet list, but there are many negatives to consider as well:

  • Poor debt management
  • Increased taxation
  • Food and Drug Administration acting as an enforcer
  • Declining volume
  • Litigation a constant threat

Both lists are equal in quantity as well as importance. Therefore, to this point it’s a wash. However, will the Conclusion tell a different story? Perhaps the Conclusion will offer a slight twist.

The chart below compares basic fundamentals for Altria, Lorillard (NYSE:LO), and Reynolds American Inc. (NYSE:RAI). Altria has a market cap of $70.81 billion, Lorillard has a market cap of $15.58 billion, and Reynolds American has a market cap of $25.04 billion.   

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MO

LO

RAI

Trailing   P/E

17.17

14.62

20.22

Forward   P/E

13.75

12.15

13.32

Profit   Margin

23.89%

23.71%

15.32%

ROE

120.91%

N/A

22.11%

Operating   Cash Flow

$3.90 Billion

$1.17 Billion

 $1.57 Billion

Dividend   Yield

4.90%

5.30%

5.10%

Short   Position

1.20%

4.90%

3.00%

 

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Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Weak        

The debt-to-equity ratio for Altria is considerably weaker than the industry average of 1.80.

Debt-To-Equity

Cash

Long-Term Debt

MO

4.33

$2.90 Billion

$13.88 Billion

LO

N/A

$1.73 Billion

$3.11 Billion

RAI

0.97

$2.50 Billion

$5.10 Billion

 

T = Technicals Are Strong     

Altria has been a strong performer over the past three years.

1 Month

Year-To-Date

1 Year

3 Year

MO

5.05%

14.00%

18.73%

101.40%

LO

5.05%

7.88%

2.20%

144.80%

RAI

5.51%

11.16%

15.81%

100.70%

 

At $35.38, Altria is trading above all its averages.

50-Day   SMA

34.44

100-Day   SMA

33.66

200-Day   SMA

33.82

 

E = Earnings and Revenue Have Been Steady                       

Earnings and revenue have been steady, but they haven’t been overly impressive, either. Are there too many headwinds for impressive growth?

2008

2009

2010

2011

2012

Revenue   ($)in   billions

19.36

23.56

24.36

23.80

24.62

Diluted   EPS ($)

2.36

1.54

1.87

1.64

2.06

 

Looking at the previous quarter on a year-over-year basis, revenue and earnings both showed moderate improvements.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

6.13

5.65

6.49

6.24

6.24

Diluted   EPS ($)

0.41

0.48

0.60

0.32

0.66

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Government restrictions on tobacco consumption in addition to more health-conscious consumers have hurt the industry. Many tobacco companies are being as innovative as possible to reduce the health effects of tobacco, but this is a challenging task.

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Conclusion

Despite selling an addictive product and consistently delivering profits and paying out healthy dividends, the industry has become a lot more challenging than it was in previous years. Altria is also likely to be highly sensitive to steep market corrections. Therefore, Altria is a WAIT AND SEE.

Phillip Morris International (NYSE:PM) is a better defensive play simply because of its international exposure. These consumers aren’t as health-conscious, and there isn’t as much regulation and taxation. Phillip Morris also consistently delivers huge profits and yields an impressive 3.50 percent. Phillip Morris still isn’t the best defensive play in the world, but it should perform better than Altria in a difficult environment.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.