Valuing Big Tobacco, Part I

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 |  Includes: LO, MO, PM, RAI
by: CRG Research

In this series, we are going to value the common equity shares of Altria (NYSE:MO), Lorillard (NYSE:LO), Reynolds American (NYSE:RAI), and Philip Morris (NYSE:PM). I have been bearish on these firms in previous articles, and all four issues are showing signs of weakness. In other words, the share prices are declining. That said, in this article, we are going to look at the performances and positions of these firms between 2007 and 2011.

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Revenue grew at every firm except Reynolds American. Altria's revenue peaked in 2010. Reynolds American's revenue is well off of the 2008 level. Philip Morris increased revenue 11.3 percent in 2011 compared to 2010. Lorillard's revenue was the most risky and Reynolds American's the least risky.

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Net income of every firm except Altria increased. Altria's 2011 net income declined 13.2 percent compared to 2010. Lorillard's 2011 net income increased 8.5 percent compared to 2010. Reynolds American's 2011 net income increased 25.4 percent compared to 2010. Philip Morris's 2011 net income increased 18.3 percent compared to 2010. Lorillard's net income was the least risky and Altria's the most risky.

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Cash flow from operations growth was strong from all firms except Altria. Reynolds American's 2011 cash flow from operations was slightly below the 2009 peak. Altria's cash flow was the most risky and Lorillard's the least risky.

(click to enlarge)Click to enlargeAll of the firms except Reynolds America did a horrible job of increasing equity. Total equity declined substantially.

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Altria's and Reynolds American's assets declined. Lorillard's assets were flat. Philip Morris's assets increased slightly.

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Across the board the trend is towards increasing liabilities. That said, Reynolds American's liabilities declined slightly. Philip Morris's and Lorillard's liabilities increased substantially.

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After declining, Philip Morris's cash balance increased between 2009 and 2011. Lorillard's cash balance peaked in 2010, but overall is trending higher. Reynolds American's cash balance is declining and Philip Morris's cash balance is increasing.

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Philip Morris is the dominant player and increased its share of revenue. Reynolds American's share of revenue is declining. Lorillard and Altria's share of revenue has been pretty much flat.

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In 2011, Lorillard was the most profitable firm followed by Reynolds American. Lorillard's profit margin is shrinking while Reynolds American's profit margin is expanding. Altria's profit margin is shrinking and Philip Morris's profit margin has been stable.

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Because of shrinking total equity, return on equity is substantially higher than it should be for Philip Morris and Altria. Reynolds American's return on equity was 22 percent in 2011.

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Lorillard and Philip Morris have done an excellent job of generating return on assets.

To be continued...

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.