Altria Continues To Fire Up Value And Profitability

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About: Altria Group, Inc. (MO)
by: Stock Market Arbitrage
Summary

Altria Group Inc. and its subsidiaries remained highly durable in the US tobacco industry as its sales kept growing significantly despite the restriction on tobacco products in many cities.

Its investment in AB SABMiller has been a huge factor that stimulated its non-operating income in the last two years.

The dividend payment has been increasing and attracting a multitude of long-term investors over time.

Its stock price is now leaving its low point. There may be a higher resistance and support level.

The M&A deal with JUUL Labs Inc. and investment in Cronos Group will add value.

Altria Group Inc. (MO) remained formidable and versatile despite the challenges that have transpired in the industry. For many years, health organizations have been organizing campaigns against the massive production and purchase of combustible cigarettes in many states. Nevertheless, it supported the act though it might have posed a serious threat to its financial performance as many of its fellows had a hard time coping with it.

In the last 15 years, it did its best to withstand all these by diversifying itself and adapting with the changing condition of the market. Apparently, it kept soaring high as shown by its impressive revenue. Together with its subsidiaries, it continued to eat a huge part of the segment's pie and was expected to do so in the coming years since it just tied the knot with JUUL Labs and Cronos Group last quarter.

Income Statement

Altria got $6.11 billion from its sales in Q4 2018. Its 12-month revenue amounted to $19.63 billion. Meanwhile, its EPS fell to $3.99 from $5.31 in 2017 driven by non-operating costs such as the acquisition of Juul Labs and Cronos Group and a higher income tax. However, it is still undeniably impressive. Despite the double acquisition cost in December, net income amounted to $7.6 billion which proved its self-sufficiency. Furthermore, one must understand that the cost it incurred from its M&A didn't form part of its core operations. Its bottom line earnings would increase as well had MO decided not to do so. Wall Street Journal also expressed its optimism as it estimated the company’s EPS at 0.99 and 1.07 for Q1 and Q2 2019 respectively.

Its historical annual reports show the same trend. MO has been doing a really great job as shown by its strong sales. From $17 billion in 2013 and 2014, it rose to $18.85 billion in 2015. It then instantaneously rose to $19.34 billion in 2016 and $19.49 billion in 2017. Meanwhile, its operating costs and expenses played at seven billion and two billion respectively which resulted in high gross profit margin and operating income. Profit before tax sharply rose to $21.85 billion in 2016 from just $8.08 in 2015. Net income doubled in 2016 and 2017.

Quarterly Net Sales

(in $ billions)

2018

2017

Q1

4.67

4.59

Q2

4.88

5.07

Q3

5.29

5.12

Q4

4.79

4.71

Accumulated

19.63

19.49

Annual Net Sales (in billions)

2013

17.66

2014

17.95

2015

18.85

2016

19.34

2017

19.49

2018

19.63

See Altria Group Inc. This was verified with the US Securities and Exchange Commission. Both years were moving in almost the same direction, giving a positive gap of more than $100 million.

See Altria Group Inc. This was verified with the US Securities and Exchange Commission. Projected Values (2019-20122) were derived using Linear Trend Forecasting. This agrees with the company’s uninterruptedly increasing sales. Acquiring e-cigarettes and cannabis along with the former’s increasing hype plus the latter’s possible legalization for medical and recreational purpose will definitely increase the company’s sales.

This was taken from Wall Street Journal. EPS for 2022 was derived using Linear Trend Forecasting.

See Altria Group Inc.. This was verified with the company website and the Wall Street Journal.

Balance Sheet

MO’s cash and equivalents in 2018 greatly reflected the three-year variation when Altria invested in Juul Labs and Cronos Group. This is the same in 2017 when it invested as well in AB SABMiller in 2016 which showed a slight to substantial decrease. Fortunately, it regained its strength in 2018 as it went up to $2.45 billion in Q3 2019. Moreover, its receivables continued to increase conveying the increasing demand for its product. Meanwhile, its long-term investments kept increasing which made its non-current assets grow more. From $34.6 billion in 2013, total assets sharply increased to $55.64 billion in 2018 producing a 21-billion growth. On the other hand, the value of its liabilities has been $40.81 billion with a $14-15 billion difference from its total assets. As a result, net worth has been increasing throughout the years. This is even supported by the movement of its Equity as more investors were attracted to its impeccable performance, more investments kept coming so that the company kept paying its borrowings and interest expense which adheres to the positive trend in its Income Statement.

In billions

Total Assets

Total Liabilities

Net Worth

2013

34.86

30.71

4.15

2014

34.48

31.43

3.05

2015

31.46

28.55

2.91

2016

45.93

33.12

12.81

2017

43.2

27.78

15.42

2018

55.64

40.81

14.83

See Altria Group Inc. This was verified with the US Securities Commission. It can be obtained by subtracting total liabilities from total assets. In 2016, the company’s net worth rose sharply and never faltered again. This confirms the fact that the company is solvent enough to cover all its operations and obligations. The future amounts were calculated using Linear Trend Forecasting.

See Altria Group Inc. This was verified with the US Securities Commission. Forecasted amounts were derived by the Linear Trend Equation. This shows that as the company continues to recover and increase its earnings the profitability increases as well, increasing the value of every asset to be purchased and invested in the next five years.

Cash Flow

Cash inflows greatly offset its outflows this year giving an increment of $642 million compared to its comparative time series. Despite its consistently increasing expenditures on fixed assets and dividend payments to its shareholders, the company remains vigorous. Its ability to generate income from its assets and investments plus its increasing sales can easily cancel out all the outflows the company incurs.

What’s in Store for the Investors?

Dividends

Long-term investors must have been assured and certain throughout the years despite the challenges it faced. The company’s performance continues to boom so is the quality of dividend payments. From $0.48 ($1.84 in four-time series) per share in 2013, it went up by $0.32 with a total amount of $1.2 billion in five years. Now it’s $0.80 per share, $3.0 per share as the accumulated amount in 2018.

Taken from NASDAQ

With the positive trend of its operations, there may be a more astonishing increase in the succeeding years. How long can the company suffice this? MO has a dual strategy: further development of operations and acquisition of interests in companies of similar nature. AB SABMiller is for beers. Juul Labs is for e-cigarettes as alternatives for combustible cigarettes. Cronos Group is for cannabis. All of these are beneficial to MO. Its net sales kept increasing relative to its controlled operating cost and expense which resulted in higher operating income. And even after the costly acquisition of the two companies, the company still had enough net profit to cover all its obligations. This is an indicator of the company’s unshakeable fundamentals. With this, the company attracts more investors.

Stock Price

Though the stock price of Altria seems to have left its lowest point, it is still relatively cheap and becomes more visible and valuable to many short-term investors. Notable finance sites such as Yahoo Finance and Morningstar posted identical results with 3.68 as Diluted EPS (NYSE:TTM) and $49.55 as to closing price giving us a PE Ratio of 13.24 during the first week of February. So for the short-term investors, now is the time to purchase stocks. Seize the opportunity as it is starting to leave the area and is about to create a higher price level. Given the increasing hype of its investment in e-cigarettes and cannabis plus the insistent call to legalize the latter, Altria just doubled its value.

In 2018, its volatility was fine but the support and resistance level continued to decrease, from 65-69 to 60-64 to 50-55. During the latter part of January 2019, it fell to 43 before rising to 44-47. It climbed again to 48 to 49 and is expected to do so in the following weeks.

A new and higher price range is expected to start this month. Thus, short-term investors must take advantage of this moment while MO’s price is still low.

MO with E-Cigarettes and Cannabis

Manufacturing and purchasing combustible cigarettes is still legal in the US but has long been discouraged. This has been a big problem in this industry. This is also the reason for MO’s wise move to get Juul Labs Inc. which produces e-cigarettes that have been getting increasing demand since its release. Along with this is the insistent and utmost call to legalize cannabis not only for medical use but even for recreational purposes which is an advantage for Cronos Group. It is known to many that cannabis is effective to treat many terminal illnesses and even for anxiety and depression. Thus, it will have a higher demand and generate more sales for the company.

The move of Altria Group to make M&A deals with these two is the primary reason for net income decrease in 2018 as a non-operating expense. Nevertheless, it is really a sagacious move because it is timely and relevant which will not only help it diversify its products, investments, and income but also benefit its investors, which in turn, will attract the potential ones and generate more income, return on assets and dividends.

Investment Decision

Altria Group is a really strong company for its ability to widen the span of its product line and investments while maintaining its operations despite the restriction on combustible cigarettes. Now, it is more strategic that it begins to engage in e-cigarettes and cannabis that are persistently requested to be legalized. Despite the breakpoints it faced, the company was able to thwart all these and protect itself and its investors while giving them satisfactory gains.

Nothing much to say but one is deeply encouraged to invest here whether he is a long-term or short-term investor.

For the long-term investors, it must be inculcated that the company stood the test of time and is still doing very well as its core operations suggest. Its dividend is evidently increasing and is expected to be at a higher rate this year. A long-term investor is assured when he comes back after many years; he will reap all the earnings that have accumulated.

A short-term investor must know that MO’s stock price already reached its low point two weeks ago and is now starting to rise again. The stock is still relatively low at PE Ratio 13.24 with its bullish trend. This indicates its continuous increase this month.

Disclosure: I am/we are long MO. 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.