Is Altria A Smoking Investment?

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

Editor's Note: This article contained inaccurate information regarding declines in Altria's revenue and book value, and that information has been removed.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to focus on a leader in the United States tobacco industry: Altria Group Incorporated (NYSE: MO).

<img src="http://stockcharts.com/c-sc/sc?s=MO&p=D&yr=1&mn=0&dy=0&i=t24213316927&r=1359842891617" />

Strengths:

  • Dividend: Currently, Altria pays out quarterly dividends of $0.44, which when annualized puts the dividend as yielding 5.15%
  • Double Digit Margin: At the moment, the company carries a net profit margin of 20.40%, leaving plenty of room for unexpected expenditures
  • Institutional Vote of Confidence: 60% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Solid Net Income Growth: In 2008 Altria reported net income of $3.09 billion; in 2012, the company announced net income of $4.18 billion, representing year over year annual growth of 7.85%, despite experiencing negative revenue growth during this period, which represents a company with expanding margins (Not Profit Margin: 2008=16.0% 2012=23.9% 2015 Projected=29.3%)  
  • Addictive Business Model: Altria’s products--cigarettes, smokeless products, cigars, and wine--are all extremely addictive to the users, which establish solid revenue streams for years to come

Weaknesses:

  • High Valuation: Currently, Altria carries a price to earnings ratio of 16.60, a price to sales ratio of 2.81, and a price to book ratio of 21.85; all of which indicate a company trading with a high valuation when the company’s growth prospects are taken into account
    <img src="/media/images/user_13174/12_1_large.png" />
  • Unhealthy Offerings: All of the company’s offerings are unhealthy products, and have been proven to have a distinct link to users’ deaths, which is a major weakness of the company
  • Net Debt: Despite possessing $2.2 billion of cash and cash equivalents on their balance sheets, the company’s $14 billion debt load results in a net debt of $11.8 billion, which could be a potentially dangerous factor

Opportunities:

  • Increasing Revenue per Cigarette: In 2008, Altria derived $0.111 of revenue from each cigarette; currently, the company derives $0.161 of revenue from each cigarette it sells, and further growth in this figure will benefit the overall company
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  • Product Innovation: Offering innovative products could excite customers and capture market share, boosting revenue growth
  • Growth in the Smokeless Products Market: The United States smokeless products market is one of the fastest growing in the world, going from $1.18 billion in 2009 to $1.38 billion currently, and further growth in this market could result in revenue growth (15.95% of overall business is concentrated in the smokeless products segment)
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  • Growth in Cigar Market: In 2009, 4.10 billion cigars were sold in the US.  Currently on an annual basis there are 4.35 billion cigars sold per year, and further growth in the cigar market could benefit the John Middleton’s segment of Altria’s business (2.49% of overall business is concentrated in the cigar segment)
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  • Growth in Wine Market: The US wine market has grown from $22.9 billion in 2009 to $25.8 billion currently, and further growth could benefit the Ste. Michelle brand and fuel overall company growth slightly (1.81% of overall business is concentrated in the wine segment)
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  • Dividend Growth: Since implementing their dividend program in 1928, Altria has consistently raised their dividend payouts, a trend which is highly anticipated to continue well into the future

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Threats:

  • Competition: All the industries Altria operates in are extremely competitive, and the competition to offer the best product for the least amount of money can lead to margin compression
  • Shrinking Cigarette Market: The United States cigarette market is rapidly diminishing, with 333 billion cigarettes sold in 2008 shrinking to only 265 billion currently, and further decay in this segment, which makes up 69.63% of total business, could pose serious problems to overall business
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  • Government Regulation: Increased taxes or regulation on the tobacco industry could severely cripple Altria
  • Stagnant Economic Landscape: The luxuries Altria offers are rather expensive, and in a stagnant economic landscape, less Americans possess the money required to pay for Altria’s products

Competition:

Major publicly traded competitors of Altria include Reynolds American Incorporated (NYSE: RAI), Vector Group Limited (NYSE: VGR), Lorillard Incorporated (NYSE: LO), and Philip Morris International Incorporated (NYSE: PM). All companies except for Phillip Morris compete with Altria and pose major threats to the company’s success; Philip Morris operates the same brand name as Altria internationally. Reynolds American is valued at $24.86 billion, pays out a dividend yielding 5.31%, and carries a price to earnings ratio of 16.83. Vector Group is valued at $1.34 billion, pays out a dividend yielding 10.41%, and carries a price to earnings ratio of 60.86. Lorillard is valued at $15.35 billion, pays out a dividend yielding 5.23%, and carries a price to earnings ratio of 14.20. Philip Morris is valued at $147.23 billion, pays out a dividend yielding 3.86%, and carries a price to earnings ratio of 17.61.

The Foolish Bottom Line:

Financially, Altria is a company on the brink of disaster. The company has a massive debt load and a falling revenue stream. The only thing keeping the company afloat is its rapidly expanding margins, a trend which can only continue for so long. A major advantage to the company is its massive dividend, but the company’s products are unhealthy and are becoming progressively more unpopular with Americans. All in all, while Altria’s dividend and expanding margins are very attractive, these are the only reasons to be in the company. 


makinmoney2424 has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. 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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