Shareholder-Centric Altria Remains Attractive For Investors

| About: Altria Group, (MO)

I reiterate my bullish stance on Altria (NYSE:MO), one of the world's leading tobacco companies. The company owns a dominant market position in the U.S., with a market share of approximately 50%. The company has been delivering a healthy financial performance and offers a solid dividend yield of 5.3%, which makes it an attractive investment option for income-seeking investors. Also, the company's new product initiatives and cost cutting measures portend well for the stock price. Moreover, the stock offers investors a potential price appreciation of 12%, based on my price target of $40.5 (calculations shown below).

Financial Performance 3Q2013
Last week, MO reported a solid financial performance for 3Q2013. The company registered net revenues of $6.6 billion for the recent third quarter, up 5% year-on-year. Net revenues for the quarter were positively affected by strong sales of smokeable and smokeless products. Net revenues for the smokeable products segment increased by 3.4% year-on-year to $5.8 billion in 3Q2013, mainly due to a higher sales volume and positive pricing. The smokeless products segment displayed a healthy picture for the quarter as well, as net revenues increased by approximately 10% year-on-year to $448 million.

MO posted an adjusted EPS of $0.65 for 3Q2013, beating analyst estimates of $0.64, up 12% as compared to the corresponding period last year. EPS for the quarter was positively affected by lower shares outstanding, lower income tax and solid performance of the company's smokeable and smokeless product segments. The company was able to deliver healthy bottom line results, despite the fact that marketing, research and administration expenses for the quarter increased by approximately 20%. The increase was mainly attributed to the company's new product initiatives and the launch of e-cigarette brand 'MarkTen'.

The declining sales volume of traditional cigarettes remains a threat and a concern for the tobacco industry, as it is adversely affecting bottom line results. However, MO was able to post a better-than-expected cigarette sales volume for the quarter, showing a decline of 3.5%, in contrast to analyst estimations of a sales volume decline of 4%. The 3.5% sales volume decline for the company for the quarter was also better than Philip Morris' (NYSE:PM) sales volume decline of 5.7% for the same third quarter.

The company's management reaffirmed its full year (2013) EPS guidance range of $2.36-$2.41, representing an EPS increase of 7%-9% year-on-year. In contrast to the company's expectation, analysts have estimated an EPS of $2.40. Also, analysts are projecting a healthy next five year growth rate of 7.75% per annum. Analysts were expecting MO to increase its EPS lower end guidance range of $2.36, or a growth of 7% year-on-year, for the full year, as the company has already experienced a 9% EPS growth in the first nine months for 2013. However, I believe the company maintained its guidance range because MO can possibly increase its promotional and marketing spending in relation to the launch of MarkTen, MO's e-cigarette brand, in different states of the U.S. in the ongoing final quarter of 2013.

Stock price Catalysts
New product initiatives remain a key stock price catalyst for the company, which are likely to fuel top and bottom line growth for the company in the long run. The company has been successfully introducing its new products; in 3Q2013, MO successfully launched its MarkTen e-cigarette in Indiana. Recently, the company also successfully introduced the Tju nicotine chewing gum in Denmark. The company is continuing with its efforts to expand its MarkTen e-cigarette across different markets, and is expected to launch the MarkTen e-cigarette in Arizona in December. I believe MO's new product initiatives are likely to portend well for the stock price in the future.

Also, the company's cost saving measures and friendly shareholder return policies are likely to fuel its future earnings. MO has been pushing to improve upon its cost structure and is anticipating delivering $400 million in annualized cost savings by the end of 2013. Moreover, MO has a shareholder-friendly management, as it has been aggressively and continuously sharing its successes with shareholders, which remains an important stock price catalyst. Currently, the stock offers a solid dividend yield of 5.3%. In the last third quarter, the company increased its regular quarterly dividend by 9.1%. MO is also likely to repurchase approximately $700 million worth of common shares by the end of the third quarter of 2014. MO's share repurchase initiatives are likely to fuel the company's earnings and magnify ROE as we move forward.

The company has been delivering a healthy financial performance and has been ramping up its new product initiatives to offset the impact of the declining sales volume of traditional cigarettes, which is likely to provide long-term earnings growth for MO. Also, the company's cost savings efforts and attractive share repurchase initiatives bode well for the stock price.

Moreover, the stock offers a potential price appreciation of 12% based on my price target of $40.5. I calculated the price target of $40.5, using the S&P 500 forward P/E of 15.85x and 2014 EPS estimate of $2.56. Including a dividend yield of 5.3%, the stock offers a potential total return of more than 17%. Due to the above mentioned factors, I recommend investors buy the stock.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.