Altria Group Inc. (MO) began its activity in the tobacco industry in 1822 and has since expanded to other areas of trade and finance. Currently, Altria Group is a holding company whose interests range from the tobacco and alcohol industries to financial services, and its companies include Philip Morris USA, Philip Morris International Inc., Philip Morris Capital Corporation, US Smokeless Tobacco Co., Ste. Michelle Wine Estates, Nu Mark, Altria Group Distribution, Altria Client Services and John Middleton. In the following, the company will be examined through my model of
Let's start with U.S. macroeconomic analysis.
The GDP increased by 0.1%, better than the previous quarter in which it had fallen by 0.1% but worse than expected (0.5% increase). Therefore the GPD is in slight improvement.
The ISM Manufacturing PMI showed improvement in February (54.02) over January (53.01) and also when compared to the expectations (52.07) of the analysts.
Also the ISM Non Manufacturing PMI showed improvement in February (56.00) over January (55.00) and also when compared to the expectations (55.02) of the analysts.
Also positive are the latest figures regarding New Home Sales and Pending Home Sales, showing a recovery in the housing market.
The unemployment rate for February was not going too bad at 7.7% compared with 7.9% of the previous month and the forecast.
However it is necessary to take Industrial Production into account (-0.1%) which is worse than the previous month (0.4%), falling more than expected by analysts (0.2%).
In addition, do not forget that the government has not yet reached an agreement on the U.S. public debt ceiling, a decision that has been postponed to May 18.
Clearly neither the Republicans nor the Democrats want government bankruptcy but they also don't want to put their ideologies aside; in my point of view, sooner or later they will find an agreement.
The Beige Book confirms that the US economy is in moderate growth and employment is in slow recovery. Also my macroeconomic indicator, BR#macro = 63.89 (from 0 to 100), summarizes the climate of recovery described.
With regard to performing Fundamental Analysis, the balance sheets over the latest three years have been considered.
From 2010 to 2012 turnover increased by 1.05% while the Gross Operating Margin rose from 6,504 to 7,498 million USD with a variation of EBITDA Margin equal to 3.76 points.
The Operating Profit grew by 16.46% to 7,253 million USD and net income reached 4,180 million USD (+7%).
The profitability indicators show an increase in ROI of 3.61 points to 58.23% and an increase in ROE of 56.75 points to 131.96%.
From the financial point of view there was an increase in the Debt to Equity Ratio, which went from 1.19 to 2.93, the result of a net equity of 3,170 million USD, and a net debt of 9,285 million USD.
Based on five years of prospective balance sheets as well as those from the previous three years, the Fair Value was calculated using the Discounted Cash Flow method and the result was verified using the Economic Value Added approach.
The prospective balance sheets were drawn up based on the following assumptions:
- Revenue growth of 3%
- EBITDA margin steady at 30.50%
- Declining ROI from 58.23% to 43%
- Cost of debt falling from 10% to 7%
- Constant Tax rate at 35%
Fundamental Analysis, as described, calculates a Fair Value of $47 per share, which, when compared with the current price of $ 34.41 , indicates that Altria Group has a theoretical potential for growth of over 37%. In other words, at the current price it is certainly a good deal since you can buy an asset worth about $47 for less than $35.
Let us not be caught by the enthusiasm and explore this a little deeper.
We can estimate how the value of the security would change if our assumptions were optimistic. We focus on two of the most important financial parameters: the revenue and EBITA Margin.
We assumed a revenue growth of 3% and an EBITDA margin constant at 30.50%; now we want to calculate how the Fair Value would change if revenue and the EBITDA margin decreased or increased by 1% or 2%.
Based on the calculation, the best case scenario indicates a rise in the Fair Value to $58, at worst it would drop to $38. Also in that last case the value is still higher than the current price.
In conclusion, the Sensitivity Analysis tells us that even if the assumptions were wrong I could buy Altria Group at a price less than the more pessimistic fair value. In short, the indicator BR#sensitivity = 4.22% is positive. So from this point of view it is still worth buying
The dividend of Altria Group has always been a point of strength for investors, who can rely on a fixed annual income currently around 5% (yield 4.98 in 2012) and is expected to increase in the coming years. Pay attention in this regard because Altria Group has increased its dividends 46 times in the last 44 years.
Altria Group, as previously mentioned, includes very different companies. In this respect I want to emphasize that this means diversification and, especially at a time of uncertainty in the global and domestic markets, it helps prices remain stable and fluctuate less, as we shall see in the subsequent risk analysis.
I'd like to point out that Altria has a huge worldwide market, especially for tobacco, and geographical diversification is another very important element of stability.
I would also like to mention the initiatives of some countries concerning new smoking restrictions. Surely there will be a negative impact although it could be balanced by the progressive extension of sales to emerging markets with high potential growth.
So far we have seen that Altria is well placed in the market and the price is convenient, but we want to know the real risk grade, so let's go through the Risk Analysis.
In this regard a number of risk factors have been checked and, among the main ones, the ability of the price to react to market changes and price volatility have been considered.
The results are reassuring as Altria Group has a beta = 0.36 and its monthly volatility is around 1% on average over five years.
However, looking at risk in greater depth, there is a very important element to consider: the indebtedness of the group, which is very high and has increased in 2011 and 2012 (debt/equity from 1.19 to 2.93). The high debt is one of the most affecting factors of the tobacco companies, it is risky and must be considered with great attention.
Finally, the analysis of the risk of Altria Group is summarized in the indicator BR#risk = 66.67 (range 0 to 100) that shows a risk higher than the average value (50) mainly due to high debt/equity.
Apart from a glance at the graphs during the sector's analysis, we have evaluated the company and market just from the fundamental point of view so far.
As you can read on my bio, I am strongly convinced that both fundamental and Technical Analyses must be considered to determine whether the investment should be made or not.
Altria Group has also been evaluated in terms of price and volume by considering different time frames to have a short, medium and long term view.
The result of the Technical Analysis indicates that the trend is positive both for the long and medium term while in the short term the price has pulled back.
More precisely, after a maximum recorded on February 25 at $35.47 the price went down for five consecutive days, losing about 6%; now the prices have stabilized in a trading range wide around $1.
Volumes have increased during the pull back as well as in the phase of consolidation. So it seems that we are witnessing an accumulation phase with quite stable prices and higher trading volumes.
To evaluate the performance of the relevant market from the technical analysis point of view, let's give a glance at the S&P 500. After the bad year in 2008, the (long term) trend has been positive for all subsequent years so far. In the medium term, after the low reached in November 2012, the trend has been positive too. In the short term, the S&P 500 is having positive days from the minimum registered on February 26.
Altria Group Inc. is a well-diversified holding company with a very attractive price compared to the theoretical fair value. The risk is a little above average and could increase with time. Dividends provide a stable income to investors of around 5% each year, or more. The overall macroeconomic picture is slightly improving. It is necessary to pay attention to the possible volatility due to the temporary disagreement on raising the US debt ceiling, which could drag the shares to lower prices. Both the index and the share prices are in an up trend, stable over the medium/long term. However in the short term the price has retraced a little and seems to be in the accumulation phase. To catch the right time to buy Altria Group it is strongly recommended to wait until the trading range in progress is completed; the accumulation phase will end and a new positive short-term trend will start inside the medium-long term up trend channel. Pay attention: the breakout, to be more secure, will have to be accompanied by large volumes.