At minimum, current shareholders of Altria Group (MO) should hold until the next earnings release; interested investors should consider this an opportune entry point or review other sectors for growth opportunities. Altria Group is one of the best investments in the industry due to its favorable metrics, substantial market share and diverse portfolio. That being said, the entire cigarette industry faces significant headwinds from the FDA and government entities abroad alongside a macroeconomic environment that's impeding consumer demand.
Phillip Morris International (PM), Reynolds American (RAI), Lorillard (LO), and Vector Group (VGR) are the most comparable stocks to consider when reviewing Altria Group's financial metrics. Altria Group's price is around 15 times earnings, Phillip Morris International is around 18 times earnings and Reynolds America is around 16.7 times earnings. Altria Group's annualized dividend is around $1.76 per share; Lorillard's $6.20 annualized dividend and $8.13 EPS are the highest among these cigarette firms. Altria Group's EPS is around $2.16 while Vector Group's $0.24 EPS is the lowest among the aforementioned. Altria's sales increased 4.8% in the past 5 years.
Altria Group's debt-to-equity ratio is around 3.2; its current ratio is around 0.85. Altria Group's ROE is around 99%, its operating margin is around 27.7% and its profit margin is around 17.4%. Altria's short ratio is around 3.7, all of the firms have a short ratio around 3 or higher; Vector Group's 16.6 short ratio is the highest among these. Altria has the lowest beta score among these firms but its 11.6 million average volume and 0.9 relative volume are the highest among the firms. Altria Group stock is up 14.6% YRD but has traded at a 1.7% deficit during the past month. Altria Group stock has decreased around 9.2% since its last earnings release.
On its latest earnings report, Altria's second quarter revenue totaled $6.48 billion, increasing 9.6%, YOY. Second quarter cost of sales totaled $2.08 billion, increasing 2.8%, YOY. Second quarter net earnings attributable to Altria Group totaled $1.22 billion, increasing over 100%, YOY. Altria Group finished the first half 2012 with $1.52 billion, decreasing from $2.06 billion, YOY. Altria Group's long-term debt remained flat at $13.08 billion; Moody's, Standard & Poor and Fitch all had a stable outlook for Altria at the end of the first half 2012. Revenue increased due to higher revenue from Altria's financial services, smokeless and smokeable products divisions. Cost of sales increased due to higher manufacturing costs, higher FDA user fees, and higher per unit settlement charges.
Second quarter tobacco revenue totaled $6.32 billion, up from $6.26 billion, YOY; operating income increased to $1.88 billion from $1.80 billion, YOY. Smokeless products accounted for $426 million in revenue and $240 million in operating income. Smokeable products accounted for $5.90 billion in net revenues and $1.64 billion in operating income. Marlboro shipment volumes decreased 0.8%, YOY; discount cigarettes volumes increased 24%. Black & Mild shipment volumes increased 7.1% in the first half 2012 but only 0.6% in the second quarter. Total smokeable products shipment volumes decreased 1.1% in the first half 2012 and increased 0.1% in the second quarter. Cigarettes accounted for 50.1% of Altria retail share, Marlboro totaled 42.9%; cigars totaled 30.1%. Second quarter Copenhagen and Skoal shipment volumes increased 12.6% and 6.6%, respectively.
In the beginning of September, Altria Group management provided a sense of the firm's current standing in the industry and projections for the near term future at the Barclays Back-to-School Consumer Conference. Altria's Marlboro brand is the largest and most profitable cigarette in the US. Altria focuses on promoting the four Marlboro products families, red, gold, green and black in order to maximize profitability. Through most of its products, Altria's primary, most profitable and most consistent market is males age 20 to 29. Around 90% of Marlboro customers purchase the brand 100% of the time; this is the highest loyalty rate of any brand in the industry.
Altria remains focused on seasonal and promotional campaigns alongside new product launches in order to maintain sales volumes in its smokeless and smokeable products. Investments in Verve and Ste. Michelle Wine Estate underscore the diverse approach Altria is taking to generate revenue. Altria expects its EPS to increase 7% to 9% by the end of 2012; this stock has outperformed the S&P 500 by 390 bps YTD. Beyond its $1.5 billion cost reduction initiative, Altria expects to realize $400 million in annualized savings around December 2013. Management recognizes it has to contend with and comply with FDA regulations while building its portfolio to fulfill smokers' divergent interests.
The FDA recently requested a review of the previous panel's decision that ruled out FDA regulations requiring cigarette firms to display visual warnings of the health risks and a number for a toll-free quit hotline on the packaging. Reynolds American and Lorillard were a part of the group that sued the FDA in 2011, claiming the FDA's regulators violated the First Amendment. More recently, Phillip Morris International and other international cigarette firms have less than a month to convince the Russian government to reverse or scale back the proposition to ban smoking from public areas. Around 143 million people or 39% of Russia's population are habitual smokers. Vladimir Putin believes that reducing the prevalence of alcohol and smoking will help deter Russia's declining population. On the first of November, Russia may ban advertising and cigarette sponsorships immediately; the ban against smoking in public places would take hold in 2015.
Altria leads the sector with 50% market share in the US; revenues are projected to increase 5% this year. Reynolds American's 30% market share is the next highest; revenues are projected to decline 1%, YOY. Lorillard has 10% market share and sales increased 10% in 2011, and are expected to increase 4% this year, excluding any potential FDA bans on menthol in the near term. This industry is in decline; tobacco volumes are expected to contract 4% annually; the high dividends and payout rates will decline as demand and profit margins feel pressure under the aforementioned headwinds. Altria has one of the most effective approaches to adapt to the evolving demands of the market, but industry-wide headwinds do present significant challenges for future growth in this sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.