Will Altria Turn It Around?

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Shares of Altria (NYSE: MO) have had a downward trend in the past couple of months along with the rest of the market. Despite the recent fall, the company’s stock has outperformed the S&P500. The company’s cigarette volume sales decreased during the first nine months of 2012, compared to the first nine months of 2011. The increase in revenues was mostly due to the fact that the company raised prices. Will this company be able to rally by the end of the year? Let’s also examine how the company has performed compared to the market and other tobacco companies.

During the first nine months of 2012, the company’s net revenues increased by 0.7% compared to the same time frame in 2011. This rise, however, was mostly due to a price increase. In terms of volumes, the company’s estimated cigarette volumes for the first nine months of 2012 was 3% below the volume of cigarettes sold in 2011. Thus, even though total revenues increased, the total sales declined while the price rose.

According to one study, the price elasticity in the tobacco market is -0.48. This figure means that for a 1% increase in price will result in a -0.48% drop in consumption. Therefore, even if the company will continue to raise its prices, the decline in consumption is likely to curb the rise in sales. Conversely, as long as the price elasticity will remain less (in absolute terms) than -1 the effect of a price increase on revenues will continue to be positive.

Let’s turn now and examine how the company compared to the market and other related tobacco companies.

Altria and Dividend

The company is among the leading tobacco companies in terms of dividends: the company’s quarterly dividend is set at $0.59 per share which represents an estimated 5.78% annual yield. In comparison, Philip Morris (NYSE: PM) offers a quarterly dividend of $0.85, which results in an annual yield of 4.01%; Lorillard (NYSE: LO) offers $1.55 per share per quarter which comes to a 5.5% annual yield Reynolds American (NYSE: RAI) offers a $0.59 per share dividend, which represents an annual dividend yield of 5.78%.

 Altria Compared to Other Tobacco Companies

In terms of operating profitability, Altria hasn’t outperformed the major tobacco companies: during the third quarter the company’s operating profitability was nearly 17.5%, which was much lower than the company’s operating profitability during the same quarter in 2011. Moreover, the company’s profitability was lower than the profitability of Lorillard or Reynolds American (NYSE: RAI). The table below shows the changes in these companies’ operating profitability in recent quarters.

<img src="/media/images/user_12845/mo-and-lorillard-operating-profitablity-2011-2012_large.jpg" />

In terms of revenues, Altria’s sales increased by 2.2% in the third quarter in 2012 compared to the parallel quarter in 2011. In comparison, Reynolds revenues declined by 3.8% while Lorillard’s revenues rose by 2.4%. Thus, Altria was in the middle of the pack in terms of revenues growth during the third quarter. 

In the U.S, Altria is still the leader in terms of market share in the cigarette market with nearly 50%, followed by Reynolds and Lorillard with market share of 28% and 12.6%, respectively. 

Altria and S&P500

The relation between Altria’s stock and S&P500 is still strong and robust. During the past couple of months the linear correlation between the two indexes reached 0.67. The strong relation suggests that part of Altria’s rally may have been due to the rise in the S&P500 index during the year. During October and November (UPD) the company’s stock declined by nearly 6.86% and the S&P500 by 4.21%. Despite the recent fall in these indexes, they are still up for the year by 11.7% and 8.1%, respectively.

The chart below shows the development of the company’s stock and the S&P500 during the year (prices are normalized to the beginning of the January).

<img src="/media/images/user_12845/altria-group-2012-and-snp500-september_1_large.jpg" />

Final Thoughts

Despite Altria’s modest rise in revenues, the fall in net income, cigarette volumes and operating profitability, the company is still strong and robust. The company didn’t outperform other leading tobacco companies during the recent quarter, but the company still has a very strong hold in the U.S market. Lastly, even if the company will continue to raise its prices, it is likely to keep the company’s revenue growth. 

For further Reading: Will Oil Continue Its Tumble?

Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

 


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