Valuing Big Tobacco, Part II

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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). The previous article examined the financial performances and positions of the firms between 2008 and 2011. In this article, we'll examine 2012's first half performance and position. Further, we'll take a look at the effectiveness of management.

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Altria's revenue increased 14.9 percent in the second quarter compared to the first. Lorillard's revenue increased 13.4 percent in the second quarter compared to the first. Reynolds American's revenue increased 12.6 percent. Philip Morris's revenue increased 11.2 percent.

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Altria's net income increased 2.5 percent in the second quarter compared to the first quarter. The net income of all four firms increased. Reynolds America and Lorillard had the largest net income increases.

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Total equity increased for Altria and Lorillard. Philip Morris's total equity turned negative. Further, Philip Morris had the largest decline in total equity.

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Total assets declined across the board in the second quarter compared to 2012's first quarter. Lorillard had the largest decline in total assets and has the smallest asset base. Altria's net income and revenue are much lower than Philip Morris, but the two firms have comparable asset bases.

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The shares of total revenue were the same compared to last year and the first quarter compared to the second quarter.

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Altria's profit margin increased compared to 2011. Reynolds American's profit margin increased substantially. Philip Morris's profit margin increased compared to 2011. Net profit margin or profitability is a major factor in my recommendations.

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All four firms has solid returns on assets and are on pace to increase full-year return on assets. Lorillard had the highest return on assets followed by Philip Morris.

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The return on equity comps are confusing because of negative equity. That said, Reynolds and Altria are on pace to increase full-year return on equity.

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.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.