Altria Group Earnings: Does Big Tobacco Have a Bright Future?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The largest U.S. tobacco company, Altria (NYSE: MO) has done very well over the past several years, with an almost linear rise in price since the 2008 lows. An excellent dividend payer with a 5.4% yield, this is a favorite amongst growth investors and income-seekers alike. With Altria set to report earnings on Jan. 21, investors are going to want signs that the good times will continue.
Altria, formerly Phillip Morris, is a holding company for its subsidiaries which primarily make tobacco products. Altria had a large food business until 2007, when it spun off Kraft Foods. The largest cigarette producer in America, the company’s brands include Marlboro, Virginia Slims, and Parliaments.
The major concern that I keep hearing about in regards to investing in Altria or any of its peers is the decline in tobacco users that continues to be seen across the country (note: I am not condoning cigarettes and my personal thoughts on what should be done in regards to tobacco companies are not relevant for the purposes of this article. I am simply examining Altria as an investment). However, I don’t believe this to be as big of a concern for Altria’s bottom line as most people think. Let’s say for the sake of argument that in 1970, 50% of the U.S. adult population smoked. Let’s also say that today only 30% of the population smokes. Good for the general health of the nation, but sounds bad for big tobacco, right? Not so fast: In 1970, the population was 34% smaller, so even though there are less smokers as a percentage, the actual number of smokers has remained fairly constant. Look for the company to address the declining smokers issue during the earnings call, but remember, you care about the actual number, not percentages of the population.
Having said all of that, I still think the actual number of smokers will decline over the long term, but at a slower rate than you would think. However, tobacco companies have a unique advantage in that they have more pricing control than almost any other industry, and have the ability to raise prices as necessary, to some degree. As a former smoker, I can tell you firsthand that when you’re out of cigarettes, you really don’t care how much it costs. As the largest player in the industry, I believe Altria will be the leader in pricing strategies going forward. Also, Altria’s recent restructuring measures (another thing to pay particular attention to during the earnings call) should allow the company to operate more efficiently, increasing profit margins even more.
Finally, I’d like to talk a little bit about valuation. Altria currently trades at 14.9 times 2012 earnings, which are projected by analysts to grow to $2.38 and $2.53 in 2013 and 2014. This implies 7% average annual earnings growth, which is about average for a stock with this type of P/E ratio. For comparison’s sake, competitor Reynolds American (NYSE: RAI) trades at a slightly lower multiple of 14.4 times earnings, however is expected to grow at a slightly lower 6.7% rate. The number three U.S. tobacco company, Lorillard (NYSE: LO), trades at a 14.0 multiple and is expected to grow at a higher 8.6% annual rate.
So, Altria is not the cheapest of the bunch, but is the biggest and most stable of the tobacco “big three.” More important than the earnings numbers, which tend to be a non-event since Altria met expectations the past 13 straight quarters, is the company’s outlook, particularly in regards to the restructuring efforts and the anticipated decline (if any) of their customer base.
KWMatt82 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!