Valuing Big Tobacco, Part IV

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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 valuations using a present value dividend discount model and a multiplier model price-sales. In this article, we'll conduct a sensitivity analysis of forward price-sales.

Altria

Altria's revenue-share is forecasted to continue to increase in the second half of 2012. The full-year revenue-share forecast is $12.21. The twelve trailing months revenue-share is $12.02.

Forward Price-Sales: Sensitivity Analysis
$ 12.3 12.2 12.1 12 11.9 11.8
30 2.44 2.46 2.48 2.50 2.52 2.54
32 2.60 2.62 2.64 2.67 2.69 2.71
34 2.76 2.79 2.81 2.83 2.86 2.88
36 2.93 2.95 2.98 3.00 3.03 3.05
38 3.09 3.11 3.14 3.17 3.19 3.22
40 3.25 3.28 3.31 3.33 3.36 3.39
Click to enlarge

Under the worst-case scenario, the price-sales ratio declines 12 percent from the current value. In that scenario, revenue-share increases to $12.3 and the share price declines to $30. More practically, I expect the price-sales ratio to be between 2.46 and 3.19 during the next six months. In other words, the low end of the range would be 11 percent below the current valuation, and the high end 15 percent above. Based on this analysis alone, investors would want to be buyers at price-sales values below 2.7 and sellers above 2.93.

Lorillard

Lorillard's revenue-share is forecasted to continue to increase in the second half of 2012. The full-year revenue-share forecast is $51.45. The twelve trailing months revenue-share is $49.91.

Forward Price-Sales: Sensitivity Analysis
$ 52 51 50 49
100 1.92 1.96 2.00 2.04
110 2.12 2.16 2.20 2.24
120 2.31 2.35 2.40 2.45
130 2.50 2.55 2.60 2.65
140 2.69 2.75 2.80 2.86
150 2.88 2.94 3.00 3.06
Click to enlarge

Under the worst-case scenario, the price-sales ratio declines 18.3 percent from the current value. In that scenario, revenue-share increases to $52 and the share price declines to $100. More practically, I expect the price-sales ratio to be between 1.92 and 2.86 during the next six months. In other words, the low end of the range would be 18.3 percent below the current valuation, and the high end 21.7 percent above. Based on this analysis alone, investors would want to be buyers at price-sales values below 2.35 and sellers above 2.6.

Reynolds American

Reynolds' revenue-share is forecasted to decline in the second half of 2012. The full-year revenue-share forecast is $14.71. The twelve trailing months revenue-share is $14.75.

Forward Price-Sales: Sensitivity Analysis
$ 14.9 14.8 14.7 14.6 14.5
40 2.68 2.70 2.72 2.74 2.76
42 2.82 2.84 2.86 2.88 2.90
44 2.95 2.97 2.99 3.01 3.03
46 3.09 3.11 3.13 3.15 3.17
48 3.22 3.24 3.27 3.29 3.31
Click to enlarge

Under the worst-case scenario, the price-sales ratio declines 8.5 percent from the current value. In that scenario, revenue-share increases to $14.9 and the share price declines to $40. More practically, I expect the price-sales ratio to be between 2.70 and 3.29 during the next six months. In other words, the low end of the range would be 7.8 percent below the current valuation, and the high end 7.5 percent above. Based on this analysis alone, investors would want to be buyers at price-sales values below 2.90 and sellers above 3.15.

Phillip Morris

Phillip Morris's revenue-share is forecasted to decline in the second half of 2012. The full-year revenue-share forecast is $44.87 The twelve trailing months revenue-share is $45.64.

Forward Price-Sales: Sensitivity Analysis
$ 46 45.50 45 44.50 44
80 1.74 1.76 1.78 1.80 1.82
85 1.85 1.87 1.89 1.91 1.93
90 1.96 1.98 2.00 2.02 2.05
95 2.07 2.09 2.11 2.13 2.16
100 2.17 2.20 2.22 2.25 2.27
Click to enlarge

Under the worst-case scenario, the price-sales ratio declines 12.6 percent from the current value. In that scenario, revenue-share increases to $46 and the share price declines to $80. More practically, I expect the price-sales ratio to be between 1.74 and 2.25 during the next six months. In other words, the low end of the range would be 12.6 percent below the current valuation, and the high end 13 percent above. Based on this analysis alone, investors would want to be buyers at price-sales values near 1.74 and sellers near 2.25.

To be continued...

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.

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.