Altria (MO) is currently one of the best investments in the tobacco industry. Altria has a strong balance sheet, and an aggressive plan for growth and diversification in the industry. Altria is also dedicated to returning earnings back to shareholders with reliable dividends and buybacks. Of all the large tobacco organizations, Altria has the path of least resistance in maintaining a leadership position industry-wide. In this article, I will explain why shareholders should buy and hold this stock for an extended time period, while new investors should view this stock as a defensive long-term asset to add to their portfolio.
Altria's beta is around .5 while the PEG ratio is above two. These figures underscore the reliability and stability of the stock looking forward. The enterprise value is almost $10 billion more than the market cap; this indicates that Altria is currently undervalued in the market by investors. Sales growth is relatively flat compared to 2011, while sales growth has decreased by nearly eight percent from the previous quarter. Return on equity exceeds 100 percent and has increased significantly throughout the past three quarters. Operating margin exceeds 18 percent and has also increased through the past three quarters but by less than one percent. Net margin is also relatively flat, decreasing by less than one percent from the end of 2011. The current ratio and quick ratio are slightly below one. The debt to equity ratio has increased since 2011 but settled around 3.5 for the past two quarters.
Altria's divided yield exceeds the industry average at around 4.8 percent, equating to over $1.60 annually. Price is around 16 times earnings and also exceeds the industry average. Altria's price to book ratio is more than three times the industry average. Net profit margin exceeds the industry average by almost 50 percent while Altria's return on equity is more than four times the industry average. Altria is currently undergoing some restructuring as it pays the IRS and adjusts to the evolving demand in the tobacco industry. Despite this transition phase, Altria continues to expand its brands while returning earnings to shareholders.
The government and progressive mentalities alike are making it harder for tobacco distributers to earn adequate revenues. Reynolds American (RAI) already announced it will be cutting its workforce by 10 percent by the end of 2014 due to the lack of demand for cigarettes. Higher taxes and lower wages are deterring many people from smoking cigarettes like they once did. The state of California recently tried to pass legislation to raise taxes on cigarettes by a dollar in order to deter smokers while funding further research for cancer. Altria contributed nearly $35 million towards a $46.8 million advertising campaign in order to defeat this ballot. Fortunately for Altria and Reynolds, Proposition 29 failed to pass with 50.3 percent of the voters rejecting the bill. Aside from the 110,000 uncounted votes, 28,000 more people denied the bill than supported it. Altria is taking a number of steps to adapt its business model to overcome present and future headwinds to its current revenue stream.
Restructuring its operations is the main objective. Altria is focusing more on smokeless products and diversifying its product portfolio. Altria is also raising prices moderately where it can while adding promotional lines to its already popular brands. Aside from headwinds in the market, Altria's recent earnings have been hampered by its issues with the IRS. Altria is almost through with this scenario and will be paying $450 million of the outstanding $500 million due in the second quarter of 2012. By the end of 2011, Altria had paid a sum of $1.1 billion for the blundered tax payments from 1996 to 2003. Aside from upgraded smoking restrictions within the past few years, another challenge that lies ahead of Altria is the potential ban of menthol by the FDA. Altria is combating these developments by increasing its portfolio of smokeless tobacco products. Creating more low risk products will help retain existing customers that are dissuaded by health concerns. In 2011, Altria developed a partnership with Okono A/S to develop non-combustible products with nicotine and less tobacco.
Altria just launched a new product through one of its subsidiaries, Numark in May of 2012. The product is called Verve and it was released in retail locations in the state of Virginia for a preliminary launch. The product is behind the counter and is targeted for consumers looking for a tobacco alternative. Altria's research indicates that nearly 30 percent of adult smokers are currently looking for an alternative to traditional tobacco products. The Verve product is discs that contain nicotine and flavoring but no tobacco, consumers can chew on the product and discard once they are finished. There are 16 blue mint discs n each package. Altria is also increasing its Skoal and Snus products in the market place. Altria expects to increase the volume of smokeless products by four percent annually in the next few years.
Altria is one of the more appealing investments because of its goodwill and focus on domestic markets. Phillip Morris International (PM) has suffered recently due to its exposure in Europe. Phillip Morris received almost 40 percent of its revenue in 2011 from Europe. The recent decline in economic conditions abroad has hampered Phillip Morris International's earnings significantly. PM is enduring headwinds of around 25 cents a share in 2012, whereas it experienced a benefit of 19 cents per share in 2011. PM is suffering particularly in Spain and Italy. The crisis in Europe will have a hindering effect on PM's earnings for years. Over 20 percent of PM's volume was to Europe in 2011.
Adversely, Altria has been able to release new editions of the popular Marlboro brand while increasing the price per pack as well. This is being done as it pays off the IRS and continues to raise dividends and schedule buybacks throughout the remainder of 2012. Altria has confidence in its ability to improve its wine subsidiary along with a promising outlook of the new Marlboro Black and Specialty Blend releases. Adopting a new operational architecture enables Altria to focus more on meeting and capitalizing on divergent consumer interests throughout the country. The markets remain competitive, but among the world's tobacco distributers like British American Tobacco (BTI) or Japan Tobacco, Altria clearly has the best game plan to effectively adapt to the evolving demand from consumers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.