Why Investors Are Nervous About Altria's Future

Jun.14.12 | About: Altria Group, (MO)

The tobacco industry has been incredibly popular since its inception. It is a well-known fact that people all over the world make use of, and enjoy, the easy access that they have to tobacco in its various forms. Once seen as an exotic past-time signifying wealth or travel, smoking is now a habit that transcends class, economic and cultural boundaries.

In more recent years, links between smoking and life-threatening diseases such as lung cancer have caused significant controversy, and in countries across the world, smoking in public places has been banned, and could lead to prosecution.

Additionally, health warnings have appeared on cigarette packaging, some including graphic images of diseased body parts affected by smoking. So in the modern world, when more and more people are turning away from smoking in order to improve and preserve their health, how are leading tobacco companies such as Altria (NYSE:MO) faring?

Currently, Altria's stock is trading at around $33, with strong cash flow and a lower share price in comparison to other competing companies providing 'sin' goods. Price-to-earnings ratio presently stands at 19.81, slightly behind the than the 18.55 that Reynolds American (NYSE:RAI) can offer at a higher price per share. Although one of Altria's main brands, Marlboro, represents four of every 10 cigarettes bought and smoked in the US, Reynolds has an impressive stable of brands to offer. So, in a market which is seeing such widespread prosperity, will Altria be able to hold its own against its competitors?

Unfortunately, Altria has been bombarded with criticism recently after it made a decision to continue supporting the American Legislative Exchange Council (ALEC), a group which allows key figures in large corporations to have an input on state law and legal matters. Altria has come under fire because of its involvement in the ALEC, which is thought to be responsible for passing the gun law in the state of Florida which led to the shooting of Trayvon Martin earlier this year. Considering that Altria has to pay dues on an annual basis to remain a part of the ALEC, and that other key companies such as PepsiCo (NYSE: PEP) have withdrawn from the ALEC after it because the subject of severe criticism, Altria's decision to remain a member of the group may not benefit the company's public image. Whatever Altria's motivations for being a member of the ALEC, Altria needs to consider how its associations with the group will impact upon its consumer and public relations.

Additionally, Altria's leadership has come under fire recently after news reports claimed that the company's CEO received millions of dollars in a payout at the end of the financial year of 2011. The CEO, Michael E. Szymanczyk, apparently received a sum of $10.2 million - and although this is about half of what he received the previous year, Szymanczyk and other leading figures in the company are being criticized for giving and receiving such payouts when Altria's net income has fallen by 13%.

Not only that, but Altria's leadership has faced instability since Syzmanczyk retired in May, shortly after performing his last shareholder meeting. Although a new CEO has been chosen to replace Syzmanczyk since, Martin J. Barrington, I expect that the loss of Syzmanczyk will come both as a shock and a disruptive force to the functioning of the company, and unless the management change is handled very carefully, professionally and efficiently, Altria may lose the confidence of both its consumers and its shareholders. However, since Barrington has been with the Altria Group for the best part of 20 years (he joined in 1993,) I doubt there will be too much turbulence as he adjusts to the new role.

Altria staff has also made headlines recently after a well-known director went missing under circumstances which police are describing as "suspicious." Leyla Namiranian, the director of marketing and research at Altria, went missing earlier this month after finishing a day at work, and has not been seen since. Reports claim that Namiranian may have been planning to meet up with a man who she met online before she went missing. Of course, we all hope that Leyla is found safe and well, and I think that Altria should be doing more to publicize her disappearance.

Not only would this increase the awareness of the public to Namiranian's disappearance, and therefore increase the chances of locating her, but it would also create the impression that Altria is concerned for the well-being of its employees - which, I feel, is not the impression being created at the moment. At present, a suspect is being pursued by police, with the two cell phones used by Namiranian recovered recently by the authorities.

Finally, Altria (and its competitors) are facing increasing pressure from roll-up cigarette manufacturers. Roll-up cigarettes, which can cost as little as half as much as pre-rolled packs of cigarettes, are becoming more and more popular as the prices of packets of cigarettes increase - good news for Universal (NYSE:UVV) who have seen a 16% boost in share price thanks to the demand for the tobacco leaf they source and process. Altria is currently involved in a legal and economic debate with Congress, which it hopes will lead to roll-up cigarettes being subject to the same amount of tax as packaged cigarettes and therefore more equal competition. However, I feel it is unlikely that roll-up cigarettes will come to cost the same as packaged cigarettes, and that companies such as Altria will continue to lose out.

Lorillard (NYSE:LO) is making interesting steps to embrace the new technology on offer from cigarette companies, too. As sales of the company's key brand, Newport, have been on the slide, and first-quarter earnings in 2012 were down by $9 million compared to Q1 of 2011 (presently standing at $1.526 billion), the company has acquired an e-cigarette manufacturer in deal rumored to be worth $135 million.

Overall, I believe the future is looking more and more bleak for Altria. Unless it makes some considerable changes in the way its management is both run and received by the public, I think that Altria will slowly but steadily lose the confidence of its consumers and investors. Throw in a little economic competition from roll-up cigarettes, and it will not take much for Altria's stock price to plummet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.