SWOT Plus: Altria Group

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Here at the Motley Fool we use the SWOT analysis to break down companies and see if they are worth investing in. Today I am going to add something new to the SWOT (strengths, weaknesses, opportunities, threats) analysis, a section for trends at the end. Tobacco investing has a lot to do with trends, and if you can predict smoking trends you could cash in big. Is Altria Group (NYSE: MO), which sells cigarettes under the Marlboro brand and has diversified into other industries like wine and financial services, a good investment, or are the underlying trends going to wash your investment away?

Strengths

1. Strong brand in the cigarette industry, it controls 45% of the total market and 49% of retail sales in the US

2. Large 5.3% dividend yield

3. Over the past 10 years the S&P 500 is up 59% yet Altria is up 250%

4. Altria has 55% market share in the smokeless tobacco space

5. The cigar industry in the US is quite strong (even as cigarette sales continue to fall), and Altria controls almost 30% of the cigar market with its John Middleton subsidiary

6. Altria sports high margins across with board, with an EBITA of 44% on cigars, 38% on cigarettes, and 60% on smokeless tobacco products

7. Altria is able to easily push through price increases to compensate for declines in sales volume

8. Altria sells cigarettes at all pricing points (premium brands include Virginia Slims and Parliament, low cost brands include Basic and L&M)

Weaknesses

1. Lots of debt. Altria has $2.186 billion cash on hand, but has $13.88 billion in long term debt

2. Declining sales volume. While Atria is doing a good job pushing its low cost brands and using promotional prices to get consumers hooked, its premium brands are still suffering

3. The average selling price per pack is $5.71 (the division that is seeing declining sales volume), but the average selling price per low cost pack is $4.20 (the division that is compensating for the decline in premium brands), which means that as more low cost cigarettes are sold and less premium cigarettes are sold, margins will get hurt in the long run

4. Huge tax burden. Altria and other tobacco companies get hit with a lot of state, local, and federal taxes because of the lawsuits of the 1990's

Opportunities

1. Strong growth in the smokeless tobacco space and in the low end cigarette space could help cushion the decline of premium cigarette sales

2. With Altria's $6.5 billion stake in SABMiller, as more people drink beer and beer sales rebound this stake will increase in value

3. This is very far fetched, but a decline in the sin taxes and state/federal taxes on the tobacco industry would be huge for Altria

4. Continued market share grabbing. Marlboro's market share is up 4% over the past few years, and according to Trefis could go as high as 56% (most likely it could go to 52-53%)

Threats

1. More lawsuits. The tobacco industry may have made it through the 1990's and United States vs Philip Morris, but the tobacco industry is a prime target for large class action lawsuits

2. The government requiring all cigarettes to be sold in plain white packages, which the FDA could force companies like Altria to do because in 2009 Obama gave a lot of power to the FDA to regulate the tobacco industry

3. The rapid decline in tobacco use. Less and less people in America are smoking and this is something that Altria can't stop. From C&M Reports, "Volume sales of cigarettes are expected to continue to decline through 2016 by an annual average of 1%"

4. Competition in the cigarette industry, especially in the lower price range area. American Spirits, made by Reynolds American (NYSE: RAI), are gaining in popularity. Mavericks, made by Lorillard (NYSE: LO), compete aggressively on the low end of the pricing spectrum with Altria.

5. The legalization of weed could turn would be smokers into stoners

Trends

1. More high schoolers are smoking weed and less of them are smoking tobacco as seen in this study done by the University of Michigan

                        

2. The rapid decline in tobacco use in the US in one graph. This graph from the New York state's (ny.gov) website shows how cigarette companies are using price increases to make up for the sharp fall in demand 

3. Rising taxes on the cigarette industry (from cdc.gov)



4. Some growth in the smokeless tobacco space among high schoolers (from pennpoints.net)

Final Thoughts

Altria is the best of the best in the USA tobacco industry, no doubt about that, but the trends aren't in Altria's favor. Less and less people are using tobacco each year (in the US), and those numbers will continue to decline as time goes on. While international tobacco use is on the rise, the USA's is on a steep downward slide. High schoolers who would be smokers are becoming stoners instead, taxes keep rising on tobacco products, cigarette sales fall each year, and competition will put a lot of pressure on pricing, especially in the low end market (the only area with volume growth). While Altria has matched the S&P 500's return this year, this can't go on for much longer. The 5% dividend is nice, but there isn't much going for this company. Not to mention the enormous amount of debt this company has to deal with. I'm bearish on the domestic tobacco industry as a whole, and you shouldn't bet against these trends. If you want a good tobacco play, look at Philip Morris International (NYSE: PM), which dominates almost all of the international tobacco markets and yields 3.87%.


callumturcan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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