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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. In this article, we'll value the firms using a present value dividend discount model and the price-sales ratio.

Tobacco stocks remain attractive dividend yielding issues, however, increases in the interest rates of U.S. government issues should weigh on demand for tobacco stocks. The impact of increasing rates may only have a short-term impact.

That said, based on our estimate of intrinsic value using a present value dividend discount model, Altria is undervalued. The model assumes that the dividend remains the same over the next year. While that may be an unrealistic assumption, an increase in the dividend would be icing on the cake of an undervalued common equity issue. The intrinsic value of Altria, according to the model, is between $40 and $45-share.

Common equity shares of Lorillard are moderately undervalued. To estimate the value of Lorillard's common equity shares a present value dividend discount model was used. The model assumes the dividend remains the same next year. That said, Lorillard's estimated intrinsic value is between $130 and $132-share.

Reynolds American is undervalued. The estimated intrinsic value of Reynolds American's common equity shares is about $54, a roughly 25 percent discount to the market price. The model assumed Reynolds American's dividend doesn't increase in the next year.

The common equity shares of Phillip Morris are also undervalued. The estimated intrinsic value of common equity shares of Phillip Morris is between $104-112.

Based on the present value dividend discount intrinsic value estimates, Altria and Reynolds American are the most undervalued.

Altria


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On an absolute and relative basis, Altria is overvalued.

Lorillard


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Lorillard is fairly valued on a relative price-sales basis. On an absolute basis, the firm is also fairly valued. If the price-sales ratio was closer to 2 I would consider the firm moderately undervalued.

Phillip Morris


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On a relative basis, Phillip Morris is fairly valued. The price-sales ratio on a absolute basis suggests the firm is moderately undervalued.

Reynolds American


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On a relative basis, Reynolds American is overvalued and approaching fairly valued. On an absolute basis, Reynolds American is overvalued.

The present value dividend discount model and the multiplier model conflict in terms of the relative valuation of Reynolds and Altria. The valuation models agree that Phillip Morris is undervalued.

To be continued ...

Source: Valuing Big Tobacco, Part III