Why Investors Need to Look Beyond Altria?
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Altria Group Inc (NYSE: MO) stocks have performed remarkably well posting a year to date increase of 22.37%. For investors simply looking to park their cash in some yield, Altria seems to be a good option as there is a limited downside in the stock from current levels. However, we believe the upside is limited following a significant year to date run up as the stock price rise has been primarily driven by P/E expansion (~16) rather than earnings growth. A further P/E expansion is unlikely as the major factors like stabilization in Marlboro's share; increases in cash distribution and consistent delivery of EPS have already played out. We suggest the investors to look beyond Altria to other tobacco companies like Philip Morris International (NYSE: PM) and Lorillard Tobacco Company (NYSE: LO).
How Philip Morris scores over Altria
Going forward, there are concerns about Altria’s growth prospects. In 2008, the company spun-off to shareholders its international arm Philip Morris and as a result MO won't be able to access the much higher growth of international tobacco markets. Cigarette per capita consumption in the United States is on the lower side and ranked 39th in the world. Cigarette consumption is less than half when compared to Japan and many other countries in Central and Eastern Europe. Following decades of declining cigarette trends in the U.S., cost cutting and price increase remain major growth drivers for Altria as Cigarette-group products account for over 90% of Altria's sales and profits. But for how long can the company derive profitability without volume increases? Neither can the prices be increased forever, nor can the costs be cut indefinitely. Thus, international presence and increasing market share in big markets like Japan provide Philip Morris a huge edge over Altria.
Moreover, Altria’s being in the United States has constantly struggled with regulations and lawsuits whereas Phillip Morris is benefiting from growth in markets that are less regulated and have relatively less threat of legal issues.
Why Lorillard is better bet for Defensive Investors
Investing in Altria makes a little sense for investors looking for dividend yield as Lorillard offers a better dividend yield of 4.90% compared to Altria’s 4.60% and is not as overvalued as Altria with a forward P/E of just 13.11 (at ~11.1% discount to Altria). Lorillard also runs at a higher operating margin (~44.5%) than Altria (~42.2%) and also offers better expected EPS growth (~8.6%) Thus, Lorillard clearly offers higher return opportunities.
Lorillard has also diversified its portfolio by acquiring Blu ecigs (a leading manufacturer and marketer of electronic cigarettes) in April and the company is not just limited to the U.S. Thus it can take advantage of increasing cigarette consumption in other international markets. Additionally, high levels of institutional ownership (~95.2%) in Lorillard further provide stability and support to the stock. So, among domestic tobacco companies Lorillard is definitely a good bet and certainly better than MO at the current valuation.
Going forward, we believe there is limited downside to the stock as we are encouraged by Altria’s focus on new product innovation, portfolio diversification and cost-cutting initiatives along with company’s dominant market shares in the cigarette and smokeless categories. However, our enthusiasm is tempered by stagnant cigarette market share trends and Altria's current valuation. Hence, we suggest the investors to look beyond their past favorite Altria to other tobacco companies; speaking of which we find Lorillard a good bet in the domestic arena and Philip Morris in the international circuit.
Note: The article was originally published on TheAnalystHub.com. For more in-depth research articles please visit our site today.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.
