Altria's Q3 Shows Why Tobacco Sector Is Misunderstood
We are retaining our $54 fair value estimate and wide moat rating.
Altria (MO) reported another robust performance in the third quarter, as evidence is gathering that tobacco has been one of the more defensive categories during the pandemic. Consolidated net revenue grew by 4.9% year over year on the back of a modest 2% underlying cigarette volume decline. Adjusted operating income grew by almost 9% over the same period a year ago, implying EBIT margin expansion of 2.2 percentage points, and adjusted earnings per share was flat. Given the lack of visibility into the near-term performance of many businesses, we are surprised that the market seems to have overlooked this resilient performance, and we think Altria is both mispriced and misunderstood. We are retaining our $54 fair value estimate and wide moat rating.
We estimate underlying cigarette shipment volume was down by 2% in the third quarter, offset by 6% pricing. This is a significant improvement from the 4% to 5% decline of recent years, for three reasons, in our view. First, the temporary effect of smokers staying at home and having more time and discretionary income to spend on smoking is increasing the frequency of consumption. This tailwind may ease after the pandemic passes. Second, the stabilization of Altria's premium price segments after losing share to the discount segment in recent quarters. Third, the structural effect of nicotine consumers switching back to smoking from vaping, following the clampdown on flavored liquids by the Food and Drug Administration, or FDA. While it is difficult to quantify the impact of these factors, and management has again refrained from reinstating medium-term guidance, we believe our medium-term estimate of a 3.5% annual volume decline in a normalized environment remains realistic, and assumes the vaping category does not materially rebound.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.