Altria Group Inc (MO-NYSE)

Transcription

1 March 20, 2015 Altria Group Inc (MO-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 08/12/2009 Current Price (03/19/15) $51.27 Target Price $ Week High $ Week Low $36.02 One-Year Return (%) Beta 0.51 Average Daily Volume (sh) 6,844,511 Shares Outstanding (mil) 1,969 Market Capitalization ($mil) $100,967 Short Interest Ratio (days) 1.80 Institutional Ownership (%) 59 Insider Ownership (%) 0 Annual Cash Dividend $2.08 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 0.2 Earnings Per Share (%) 8.0 Dividend (%) 8.3 using TTM EPS 19.9 using 2015 Estimate 18.3 using 2016 Estimate 16.9 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * Altria s fourth-quarter 2014 earnings of $0.66 missed the Zacks Consensus Estimate by 1.5%. However, earnings increased 16% year over year backed by strong performance of leading premium brands in the core tobacco category. Sales increased 4.7% year over year and beat the Zacks Consensus Estimate by 2.2%. We commend the company s growing market share in the e-cigarette category and efforts to adapt to the evolving consumer trends and develop less harmful alternative tobacco products. However, shift in demand from traditional tobacco products has dented volumes in the Smokeable segment. Higher fees associated with litigations and the FDA s anti-smoking campaigns are hurting profitability. Low, Type of Stock Large-Growth Industry Tobacco Zacks Industry Rank * 193 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,973 A 4,526 A 4,760 A 4,404 A 24,466 A ,008 A 4,571 A 4,753 A 4,613 A 24,522 A ,117 E 4,734 E 4,875 E 4,641 E 18,367 E ,718 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.54 A $0.62 A $0.65 A $0.57 A $2.38 A 2014 $0.57 A $0.65 A $0.69 A $0.66 A $2.57 A 2015 $0.62 E $0.72 E $0.76 E $0.70 E $2.80 E 2016 $3.03 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Altria Group, Inc. (MO) was founded in 1919 and is headquartered at Richmond, VA. It is the holding company for Philip Morris USA, Inc. (PM USA), UST LLC (UST), John Middleton Inc. and Philip Morris Capital Corporation (PMCC). PM USA manufactures and sells cigarettes and certain smokeless products in the United States. UST manufactures and sells smokeless products and wine. John Middleton Inc. is a leading manufacturer of machine-made large cigars. PMCC is a financial company engaged primarily in leasing activities. Altria reports under the following segments on the basis of products: Smokeable Products: The segment, which comprises mainly of PM USA, sells major brands like Marlboro cigarettes, Virginia Slims cigarettes and Parliament cigarettes. Smokeless Tobacco: The segment was formed after the acquisition of UST and its smokeless tobacco business in Jan The smokeless products segment includes brands like Copenhagen, Skoal, Red Seal, Husky and Marlboro Snus, a PM USA spit-less smokeless tobacco product. Wine: The segment was formed after the acquisition of UST and its premium wine business Ste. Michelle. The main brands are Chateau Ste. Michelle and Columbia Crest. The company also owns wineries or distributes wines from several other wine regions and foreign countries. Financial Services: Altria holds investments in finance leases, principally in transportation (including aircraft), power generation and manufacturing equipment and facilities. REASONS TO BUY Strong Brand Portfolio: Altria s impressive brand portfolio of tobacco and wine products helps it to maintain its strong business momentum and generate decent profit. Its portfolio boasts popular names like Marlboro, Virginia Slims, Copenhagen, Skoal, Chateau Ste. Michelle and Columbia Crest. The company has been able to maintain leading positions in cigarettes with Marlboro, machine-made large cigars with Black & Mild and smokeless tobacco with Copenhagen and Skoal. PM USA, invests continuously in improving the brand architecture of Marlboro. In fiscal 2014 Marlboro expanded Southern Cut in the Gold family and Marlboro Edge in the Marlboro Black family. Moreover, in the same year, the company upgraded its shopping website marlboro.com which provides engaging content directly to adult smokers through mobile devices. These initiatives helped Marlboro gain a major leadership in the market in the first half of fiscal The company also has plans for further innovations like Marlboro Edge, Marlboro NXT and Eighty Threes which should help the brand maintain its position. In the Smokeless segment, Copenhagen Long Cut Wintergreen and Copenhagen Black have been popular among adult dippers. Skoal s smooth smokeless tobacco has also gained market share with Skoal X-tra and Skoal Classic. Altria is also implementing strategies to enhance Skoal's equity and carefully manage Skoal Classic price gaps in select geographies. These strategies are expected to boost the brand s share in the coming quarters. Equity Research MO Page 2

3 Adapting to Evolving Demands: There has been a general shift among consumers toward low-risk, smokeless tobacco products. In fiscal 2012, Altria collaborated with Okono A/S and developed innovative, non-combustible nicotine-containing products for adult tobacco consumers. Then in Jun 2012, Altria's subsidiary, Nu Mark launched Verve Discs, which acted as a substitute for the harmful tobacco derivatives. Verve Discs had a mint-flavored, chewable tobacco product containing tobaccoderived nicotine. Furthermore, Altria forayed into the popular category of e-cigarettes with the launch of MarkTen e- cigarettes in leading markets in Indiana in Aug 2013, which was nationwide expanded in the fourth quarter MarkTen became popular soon, as it is different from other e-cigarettes, as it can be used both as a disposable as well as a rechargeable device. In fact, MarkTen was ranked among the top e-vapor brands nationally based on market share as of 2014-end. In addition, the acquisition of e- vapor company Green Smoke Inc. in Feb 2014, boosted Altria s e-cigarette portfolio. Moreover, in an attempt to boost its unconventional tobacco products, Altria entered into a strategic agreement with Philip Morris. Under the agreement, Philip Morris will market Altria s MarkTen e- cigarettes internationally and the latter will distribute two of Philip Morris heated tobacco products in the U.S. The companies have also decided to partner on a regulatory engagement related to the products. The companies will also work on gaining shares as well as improving existing versions for the products. Such collaboration is encouraging as it will help the participating companies maintain market share amid declining volume and growing awareness against tobacco products. With regard to the agreement Nu Mark is expected to begin shipping products overseas for distribution by Philip Morris in fiscal Strong Pricing is the Growth Driver: Altria has always remained afloat amid declining volumes in the cigarette industry with the help of positive pricing. The company has combated unfavorable tax environment with price increases. Altria raised the prices of its cigarettes across all brands thrice in The regular market share gains by the company s brands despite repeated price increase in several markets shows the company s strong business model and strength of its key brands. We believe that pricing is going to be the key driver throughout fiscal 2015 as a possible decline in cigarette consumption will be offset by higher prices driving top-line growth. Enhances Shareholders Value: Altria consistently returns value to shareholders. The company s dividend payout ratio was the highest in the S&P Food Beverage and Tobacco Index. The company has already increased its dividend 48 times in the past 45 years, including the latest hike of 8.3% in Aug Since the spin-off of Philip Morris International in 2009, Altria has increased its dividend every year. Dividend has grown at a CAGR of 8.9% over the past five years since The company maintains a dividend payout ratio target of around 80% of its adjusted earnings per share. REASONS TO SELL Declining Volumes: Global demand for cigarettes has been affected by the anti-tobacco campaigns. Moreover, price increases and unfavorable excise tax environment have resulted in declining cigarette shipments. State weighted excise taxes per pack of cigarettes have grown at a compounded annual rate of 4.5% since So far in 2015, 19 state and local cigarette excise tax increase proposals have been introduced. Moreover, the possible merger between Reynolds and Philip Morris may pose a threat to Altria s volume and market share, going forward. Equity Research MO Page 3

4 Restrictions on Tobacco Consumption: The tobacco industry faces many challenges, which may pressure margins. Governments around the world are imposing restrictions on tobacco companies which, in turn, are lowering cigarette consumption. The U.S. Food and Drug Administration (FDA) has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. Moreover, The governments of U.K and Australia have imposed regulations for plain packaging for cigarettes Moreover, the European Union and the FDA have proposed a ban on menthol in accordance with the Tobacco Control Act which essentially states that menthol cigarettes have an adverse impact on public health and suggests the removal of menthol. Moreover, this ban will create a serious black market for these products, which would be incredibly detrimental to all tobacco companies. The regulatory authorities have imposed marketing and product regulations on e-cigarettes as well as there is not much scientific evidence to back their ability to help smokers quit or smoke less. Such a regulation is expected to adversely impact the e-cigarette business and top line of the company in the coming quarters. RECENT NEWS Altria Misses on Fourth Quarter Earnings, Offers Fiscal 2015 View Jan 30, 2015 Marlboro owner Altria Inc. s adjusted earnings of $0.66 per share in the fourth quarter of 2014 missed the Zacks Consensus Estimate of $0.67 by 1.5%. Earnings, however, exceeded the prior-year quarter figure by 16%, backed by strong performance of leading premium brands in the core tobacco category. Revenues and Margins Revenues, net of excise taxes, increased 4.7% to $4.6 billion backed by higher sales in all segments. Revenues beat the Zacks Consensus Estimate of $4.5 billion by 2.1%. Gross profit increased 9.1% from the year-ago quarter to $2.6 billion due to lower excise taxes levied on the company during the quarter. Operating income gained 6.3% year over year to $1.91 billion due to higher sales. Segment Details Smokeable Products Segment: Revenues increased 3.3% to $3.9 billion backed by higher pricing. Shipment volume, however, declined 1.6% to billion units from the prior-year quarter primarily due to overall decline in the industry. While cigarettes retail share gained 0.1 percentage point (pp) backed by higher gains in L7M and Discount brands, retail share for cigars declined 0.4 pp. Marlboro s retail share remained flat. Adjusted operating income increased 7.8% year over year to $1.71 billion on the back of higher pricing. Operating income margins inflated 1.8 pp to 43.9%. Smokeless Products: Revenues slipped 4.1% to $428 million due to lower volume. Smokeless products shipment volume increased 1% to million units as volume growth in Copenhagen was mostly offset by declines in Skoal and Other portfolio brands. Copenhagen brand s retail share gained 1.1 pp, while Skoal witnessed 0.7 pp decline in retail share primarily due to competitive activity. Equity Research MO Page 4

5 Furthermore, adjusted operating companies income remained flat year over year at $257 million as higher pricing and volumes were offset by higher promotional expenses made by the company. Operating companies income margins declined 2.5 pp to 60%. Wine: The segment s revenues went up 8.4% year over year to $207 million mainly due to higher pricing and improved shipments. Wine shipment volume increased 9.6% to 2.81 million units as higher volume in most of the brands was offset by 10.6% decline in Other brands. Adjusted operating companies income went up 17.8% to $53 million on the back of positive pricing. Operating income margins inflated 2.0 pp to 25.6%. Fiscal 2014 Results Adjusted earnings of $2.57 per share in 2014 were in line with the Zacks Consensus Estimate. Earnings, however, exceeded the prior-year quarter results by 8%, backed by strong performance by the core tobacco business and leading premium brands. Revenues, net of excise taxes, increased 1.6% year over year to $17.9 billion backed by higher sales in all the segments. Results were in line with the Zacks Consensus Estimate. Other Financial Details During the fourth quarter of fiscal 2014, Altria repurchased approximately 6.4 million shares for nearly $275 million. Altria s subsidiary Nu Mark LLC (Nu Mark) began shipping its MarkTen e-vapor products during the reported quarter. It completed the nationwide expansion of MarkTen e-vapor products, achieving distribution in over 130,000 retail stores. The company also issued $1 billion principal amount of 2.625% senior unsecured long-term notes due in Since the Philip Morris International Inc. spin-off in 2009, Altria increased its dividend every year. Moreover, the company has increased its dividend 48 times in the last 45 years. Outlook Altria issued the 2015 earnings guidance. The company expects earnings in the range of $2.75 to $2.80. The guidance reflects an increase of 7% to 9% from $2.57 in Altria expects that its 2015 full-year effective tax rate to be 35%. The company also expects capital expenditures in the range of $200 to $250 million. VALUATION Altria Group Inc. s current trailing 12-month earnings multiple is 19.9x, in line with the industry average. Over the last five years, Altria s shares have traded in the range of 11.2x to 21.9x trailing 12-month earnings. Based on 2015 earnings estimate of $2.80, the stock is trading at 18.3x, which is a 20.8% discount to the industry average of 23.1x. At the end of the fourth quarter of fiscal 2014, the P/B multiple of the stock was approximately 37.0x, representing a huge premium to the industry average of 9.5x. Equity Research MO Page 5

6 Currently Altria carries a Zacks Rank #3 (Hold). Our target price of $54.00 is based on approximately 19.3x our 2015 earnings estimate of $2.80. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low ALTRIA GROUP (MO) Industry Average S&P PHILIP MORRIS (PM) IMPERIAL TOB GP (ITYBY) REYNOLDS AMER (RAI) LORILLARD CO (LO) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA ALTRIA GROUP (MO) Industry Average S&P Equity Research MO Page 6

7 Earnings Surprise and Estimate Revision History Equity Research MO Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MO. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1133 companies covered: Outperform %, Neutral %, Underperform 9.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research MO Page 8