Seeking Alpha
Long/short equity, research analyst
Profile| Send Message|
( followers)  

The share price of Altria Group (NYSE:MO) has appreciated by 15% over the past 6 months. At $36.51, the stock is trading at its 52-week high and offers a 4.8% dividend yield. Although the shares still represent a solid dividend investment from a long-term perspective, I would encourage potential buyers to wait for a pullback based on the following reasons:

1. Altria shares are not cheap relative to its comps. According to the comparable chart shown below, the company's consensus revenue, EBITDA, and EPS growth estimates are notably below the comps' averages. On the profit side, Altria's various margins are generally in line with the peer benchmarks, but the firm's ROIC metric is below the average. In terms of leverage and liquidity, Altria's debt load is fairly consistent with the comps' given the in-line debt to EBITDA ratio. The company has a higher free cash flow margin but a lower interest coverage ratio. Both Altria's current and quick ratios are slightly below par.

(click to enlarge)

Given the relatively weaker growth potential and in-line profitability, Altria's fair value should not command a notable premium over the comps average level. Nevertheless, the stock's current price multiples at 10.7x forward EBITDA is at a 14% premium over the peer average of 9.4x. Although Altria's forward P/E multiple is fairly in line with the group average, after accounting for the 5-year EPS growth estimates, the stock's PEG ratio of 1.9x is still 12% above the peer average at 1.7x, suggesting that the stock is modestly overvalued relative to the comps in terms of financial performance (see chart above).

2. Sell-side analysts are generally bullish on Altria. Of the total 14 stock ratings compiled by Thomson One, there are 3 strong buy and 5 buy ratings. However, their average 1-year price target at $37.08 is only 1.6% over the current share price. Given that Altria's cost of equity should be more than 5% based on the capital asset pricing model (see chart below), sell-side's average price target implies an unfavorable risk-reward profile as the stock is modestly overvalued at the moment.

3. The stock's dividend yield is approaching its 3-year low, which was achieved in July 2012, and it is currently below the yields for Reynolds American (NYSE:RAI) and Lorillard (NYSE:LO). If history is a good guide, there would likely be a yield support at around 4.5%, meaning that a further price upside could be limited (see chart below).

(click to enlarge)

Despite the above negativity, there remain a few reasons for existing shareholders to continue holding the stock:

1) The stock's forward P/E multiple at 15.1x is just 2.7% above the same multiple of S&P 500 Index, which stands at 14.7x now. This relative valuation level is supported by the facts that Altria's 5-year earnings growth estimate at 8.1% is in line with the average estimate of 8.2% for the S&P 500 companies and that the stock's 4.8% dividend yield is considerably above the 2.5% average yield for the S&P 500 Index.

2) Altria's consensus revenue, EBITDA, and EPS estimates for 2013 and 2014 have trended steadily over the past 12 months, and most of their current values are slightly higher than the historical figures in a year ago (see charts below).

(click to enlarge)

(click to enlarge)

(click to enlarge)

3) The 4.8% yield remains attractive under the current low-interest market environment and the level of downside support cannot be ignored.

For potential buyers, I would recommend to wait for a pullback or sell out-of-money put options for a better margin of safety. Everything else being equal, I will be a buyer if the share price drops to around $34.

All charts are created by the author except for the consensus estimate tables, which are sourced from S&P Capital IQ, and all financial data used in the chart and the article is sourced from S&P Capital IQ unless otherwise specified.

Source: Altria: Some Concerns On The Price Momentum