Altria (NYSE:MO), a heavyweight in the American tobacco industry, is synonymous with the globally recognized Marlboro cigarette brand. Having affiliations with recognized names like John Middleton, Phillip Morris Capital Corporation and Phillip Morris USA, it effortlessly muscles out competitors like Lorillard (NYSE:LO) and Reynolds (NYSE:RAI) - and even gives titans like British American Tobacco (NYSEMKT:BTI) and 22nd Century Group a run for their money.
Lorillard trails with regards to market cap - a measly $17 billion compared with Altria's $63 billion. Reynolds, on the other hand, is wedged in between the two with its $23 billion. All the same, there is some huge daylight between Altria and its prominent competitors and I believe that this speaks volumes about Altria. Although numbers may sometimes extend a misleading illusion, I am inclined to believe that Altria has a bright future. Notwithstanding, there are some core barriers.
At the moment, Lorillard has fortified a firm platform to stage its prevalent aggression in the industry. In as much as the financial dynamics at Lorillard impose a lot of incertitude in canny investors, its stock should not be overlooked. It ironically exhibits the highest quarterly revenue growth, an incredible 10%. Altria merely offers half of what Lorillard extends while Reynolds remains stagnant, a quarterly revenue growth of 0.1% couldn't say less.
When it comes to earnings per share, Lorillard also muscles through the Reynolds and Altria with its $7.9. A presumably bigger Altria extends a mere divide-$1.64. Even the 'stagnant' Reynolds performs better than Altria in this sector. Even with the swelling magnitude of bottlenecks, I still find myself disposed toward Altria. These are mere numbers and there are a lot of factors that make Altria the better stock.
Why is it the better option? First, Altria has a stronger financial muscle. The importance of a solid financial backing cannot be overlooked in a tobacco industry that has been plagued with lawsuits, government regulations and unending pressure from anti tobacco campaigns. Just recently, Altria, Lorillard and Reynolds were compelled to pay bombastic amounts to the state. The gross sum adds up to a whopping $6.5 billion for all three behemoths.
However, Altria is the most adversely affected as it had to fork out $3.5 billion. This figure is enough to run the annual budget of some countries. On the flip side Lorillard, a formidable competitor, will have to part with less - $1.1 billion. Reynolds will equally have to pay $1.9 billion. In as much as the dreaded knockout punch falls on Altria I believe that its financial tendon can stretch long enough to accommodate the big blow. On the other hand, Lorillard and Reynolds will have to part with a whole arm, figuratively speaking.
Personally, I believe that this news will stir an unprecedented shift in the market. Lorillard may have the edge but its financial inclination doesn't instill the much needed confidence levels in investors. I foresee a cocktail of confusion and disruption in the Lorillard camp. The same fate also shadows a moribund Reynolds that up to date has not recorded any major improvements in its quarterly revenue. In the long run, long-term investors will lean toward Altria as it offers better cushioning in the current tobacco industry that is beset with incertitude.
Another core reason why I think Altria avails a better deal as opposed to Lorillard and Reynolds is its tactful approach toward litigation. Apart from pooling a substantial amount to exclusively address lawsuits and legal proceedings, Altria also employs tact and strategy in handling courtroom affairs. It knows how to effectively suffocate negative vibe brought about by legal matters.
Reynolds would be leaps ahead if it could borrow a leaf from Altria. This is quite evident in the fashion through which it handled its loss against the FDA. The loss has blown out of proportion and is negatively affecting the healthy stock. Critics are arguing that Reynolds offers no forge of security to shareholders and prospective investors. I hate to admit it, but I have to side with the critic incline. Reynolds' failure to put a leash on the outgrowth of recent litigation drama greatly erodes the confidence levels of shareholders. Investors may start looking for entry points to more stable stocks. Altria will definitely be a prioritized option for many investors.
David and Goliath
A faceoff between Lorillard and Altria would be reenacting David and Goliath - only this time David won't win and there definitely won't be any slings and swords. Lorillard is much smaller than Altria. It does, however, mount an overwhelming level of pressure. All said its momentum has been slowed down by the current case against the FDA.
It rallies no support whatsoever for the proposed health warnings by FDA. I believe that this gnaws out the integrity of its estimable image. Its approach suggests that Lorillard is more interested in monetary gains than it is with the health of its very own customers. Canny investors know that a tainted image attracts a lot of negatives. Personally, I believe that a soiled image imposes an exceedingly heavy cost on a model stock. This will avail a chance for Altria to regain its former domineering position in the industry.
As a round up, I am still insistent on my initial speculation. Altria's silver lining is tethered around the corner. Its predominating demeanor in the stock market tells it all. I agree that Altria has not seen the best of days in recent times. All the same, I am surefooted that the uncertainty is just a passing cloud. A sunny day waits ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.