Table of Contents
- Company profile - Dominant cigarette manufacturer in the USA
- Segments
- The latest Altria quarterly figures from March 2024
- Altria share forecast 2024
- Important key figures of the Altria share from the Levermann analysis
- Valuation of the Altria share
- Conclusion on the Altria share
The US cigarette manufacturer Altria (ISIN of the Altria share: US02209S1033), known as a classic value stock, has a strong position in the tobacco industry with strong brands such as Marlboro. A market share of over 42 percent in the USA underlines this impressively. However, the core business is being visibly eroded as cigarette consumption continues to decline and the strong brands are coming under increasing pressure.
This is also reflected in the share price. Over a ten-year period, the share price has only risen by just under 13 percent. Looking at the last five years, the share price has fallen by 12.3 percent.
Although Altria is trying to gain a foothold with new products such as smokeless nicotine solutions and e-cigarettes, these have not yet found the necessary acceptance to justify a fundamental reassessment of the business model in the future.
The valuation of Altria shares is historically low. In addition, attractive dividends are paid, which have been continuously increased over the last 54 years. Regular share buybacks complete the picture. The Levermann analysis also gives positive signals.
But is this enough to add the share to your portfolio? The following Altria share analysis should shed some light on the subject.
The most important facts in brief
- Altria is a value stock with a deep moat
- However, the core business with strong brands such as Marlboro is visibly eroding
- New products are not yet finding the favor to assume a revaluation of the business model in the future
Company profile - Dominant cigarette manufacturer in the USA
The Altria Group is the leading tobacco company in the USA and pursues a diversified business model comprising various tobacco and nicotine products.
The history of the Altria Group is closely linked to the development of the American tobacco industry and dates back to the 19th century. Originally founded as Philip Morris Companies, Altria has developed into one of the largest and best-known tobacco companies in the world.
In 1847, Philip Morris opened a small tobacco store in London, which laid the foundation for the company. This was followed in 1902 by the founding of Philip Morris & Co. Ltd. in New York City to market Philip Morris tobacco products in the USA. Finally, in 1924, the Marlboro brand was introduced, which is world-famous today. In 1954, Philip Morris then launched Marlboro with the well-known cowboy image as an advertising character, which helped the brand to international fame. In the 1970s, the company diversified its portfolio and began to invest in other business areas, including food and beverages. Eventually, in 1985, Philip Morris Companies became the parent company of Philip Morris USA, Philip Morris International, Kraft Foods and Miller Brewing Company. In 2003, Philip Morris Companies changed its name to Altria Group. This was part of a strategy to move the company's image away from its tobacco products and create a broader business identity. In 2007, Altria finally spun off its international tobacco division and Philip Morris International (PMI) was listed on the stock exchange as a separate company. From then on, Altria concentrated on the US market.
In 2007, Altria took over John Middleton, a leading manufacturer of cigars. This was followed in 2008 by the acquisition of UST, a leading manufacturer of chewing tobacco products, with which Altria expanded its portfolio in the smokeless tobacco products sector. Finally, in 2018, Altria invested in the Canadian cannabis producer Cronos Group to enter the emerging cannabis market. In the same year, Altria also acquired a significant stake in Juul Labs, a leading company in the field of e-cigarettes.
No one could have guessed at the time that Juul Labs would go down as the biggest flop in the company's history. Altria invested 13 billion US dollars at the time and later had to write it off almost completely. Juul Labs faced numerous lawsuits alleging that the company had contributed to the e-cigarette epidemic among young people through misleading advertising. These lawsuits caused high costs and led to further burdens. Juul Labs e-cigarettes were finally banned in 2022. But the Cronos investment also performed poorly. Today, the share price is bobbing along at around USD 2.50. In 2019, the price was still ten times higher at over 20 euros per share.
Segments
Altria divides its business mainly into two segments: Smokeable Products and Oral Tobacco Products. Specifically, these are smoke-generating products and oral tobacco.
Smokeable Products
The “Smokeable Products” segment comprises traditional smoking tobacco products such as cigarettes and cigars. The main brands in this segment include Marlboro, Parliament, Virginia Slims, L&M and Black & Mild. In the 2024 financial year, this segment accounted for more than 88% of total sales. However, sales here fell by 3.2 percent to 21.8 billion US dollars. The bottom line was an operating segment result of USD 10.7 billion.
Altria's high market share on the US market speaks for itself. It amounts to an impressive 42.1 percent and is relatively robust. However, the Marlboro brand is also struggling with sharply declining volumes. In the 2023 financial year, the decline amounted to 8.8 percent. The small cigar business remains a bright spot with organic growth of 2.8%. However, this is a niche market.
Market conditions not easy
The cigarette market in the US is declining as more and more people quit smoking due to health concerns and government regulations. Altria is responding to these challenges by diversifying its portfolio and entering new business areas. However, the company has not shown a good hand in implementing this strategy in the past. Sales are stagnating, and the only way to avoid major sales losses is to increase prices sharply.
Oral Tobacco Products
The “Oral Tobacco Products” segment comprises smokeless tobacco products such as chewing tobacco and nicotine pouches. The main brands in this segment include Copenhagen and Skoal. These are the leading brands in the area of moist chewing tobacco (Moist Snuff). In addition, Altria owns on! a fresh brand for nicotine pouches that do not require tobacco and serve a growing market.
At the heart of the segment is risk reduction, i.e. the promotion of products that are perceived as less harmful in order to encourage smokers to switch to smokeless alternatives. The market for oral tobacco products is growing, as many consumers consider smoke-free alternatives to be less harmful to health.
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In the 2024 financial year, this segment achieved sales growth of 3.4% with an operating segment result of USD 1.7 billion. What is striking here is that the volume growth is primarily attributable to the newly acquired on! The other two brands (Copenhagen and Skoal) recorded significant volume declines.
Non-strategic investments
It should not be forgotten that Altria holds a significant stake in AB InBev, one of the largest brewery groups in the world. This stake stems from AB InBev's acquisition of SABMiller in 2016. Prior to this acquisition, Altria held around 27% of the US brewer SABMiller. This transaction made Altria one of AB InBev's largest single shareholders, with a stake of around 10.2 percent. However, it was reduced at the beginning of 2024 after a long holding period.
Overall strategy and future prospects
Overall, Altria is pursuing an overall strategy aimed at adapting to changing market conditions and consumer preferences. This includes diversifying beyond traditional tobacco products, for example by investing in cannabis (e.g. through its investment in Cronos Group) and alternative nicotine products (e.g. through its investment in Juul Labs or NJOY). Through these strategies, Altria aims to remain profitable in the long term despite the decline in cigarette consumption and to establish itself in new, growing markets.
So far, however, Altria has shown weaknesses in the implementation of its strategy. At Group level, a slight drop in sales is only reported thanks to strong price increases. Strategic options - such as the investment in Juul or Cronos - flopped. In the chewing tobacco segment, on the other hand, the innovative on! brand is developing quite well. However, it remains questionable whether it has the potential to have a positive impact on sales in the medium term.
The latest investment could be a different story. Specifically, it is an investment in NJOY, a manufacturer of e-cigarettes, in which the US tobacco company has invested 2.75 billion US dollars. It is the second attempt to gain a foothold in the e-cigarette market.
The latest Altria quarterly figures from March 2024
The first quarter of 2024 got off to a weak start for Altria with a 1% decline in sales to USD 4.7 billion. However, the declines fit seamlessly into the quarterly history. The decline in cigarette volume was somewhat stronger, with a drop of 10 percent, leading to a 3.6 percent drop in sales in the smokable cigarette segment.
In contrast, the oral tobacco segment recorded sales growth of 3.7% in the first quarter of 2024. Although further volume declines for the two largest brands Copenhagen and Skoal had a negative impact here, the new brand on! The brand increased its volume by 32.1%. However, due to the minor importance of On!, this did not yet have an impact on the segment itself, so that a volume decline of 3.1% was also recorded here in the end.
Despite a slight decline in sales, an increased net result of USD 2.1 billion was reported at Group level. One reason for this contrary development is the partial sale of the stake in Anheuser-Busch.
In March 2024, Altria sold 35 million shares in the world's largest brewery group. The company raised 2.4 billion dollars in the process. The money is to be invested in buying back its own shares. After the share sale, Altria still holds an 8.1 percent stake in Anheuser-Busch.
Lower expenses for legal disputes and a lower number of outstanding shares also led to a correspondingly stronger increase in earnings per share of 21 percent.
Altria share forecast 2024
For the full year 2024, Altria confirmed its guidance for adjusted diluted earnings per share (EPS). This is expected to be in the range of USD 5.05 to USD 5.17, which corresponds to growth of 2 to 4.5 percent compared to USD 4.95 in 2023.
The tobacco company also expects growth to occur mainly in the second half of the year. This forecast takes into account two additional shipping days in 2024 and includes planned investments to support the company's vision, including activities to promote smoke-free products and continued research, development and regulatory preparation costs for these products.
However, the guidance explicitly excludes estimated earnings per share of USD 1.17 from the sale of the IQOS Tobacco Heating System commercialization rights, which is expected in the second quarter of 2024.
Analysts see weak sales growth
Looking at the opinions of analysts, their assessment of future growth is cautious. A slight increase in sales is already expected for the current year 2024, which will continue in the following years until 2028. However, growth in the period described will not exceed a low single-digit range.
The EPS estimates look different. The strong increase in earnings of over 40% in 2023 is due to an impairment loss in 2022, the elimination of which led to a strong recovery in the following year 2023.
However, EPS growth is also expected to be well into double digits in 2024 at 12%. There are also one-off effects here, e.g. from the partial sale of the share package to Anheuser-Busch.
Looking further into the future, analysts only expect EPS growth in the mid-single-digit percentage range. The already low P/E ratio should then fall to 7.5 in 2028 if the share price moves sideways.
Important key figures of the Altria share from the Levermann analysis
The Levermann strategy is a quantitative method for valuing shares developed by Susan Levermann. It is based on a point scale that evaluates various financial and market-related key figures. The most important key figure from the Levermann analysis for the Altria share is currently the EBIT margin, which stands at 58%.
The other fundamental key figures (return on equity and equity ratio) are negative due to the negative equity, which ultimately weighs on the score. However, the negative equity also results from the share buybacks of recent years.
The company is by no means financially weak, considering the free cash flow of USD 9 billion over the last twelve months. However, there are some balance sheet challenges, such as the high level of debt or the high proportion of goodwill on the cigarette manufacturer's balance sheet.
Looking at the Levermann analysis further, most of the points gains are to be found on the technical side. The favorable valuation is particularly striking here. A single-digit P/E ratio brings two plus points on balance. But there is also a plus point for the medium-term share price performance, as well as for the rising momentum of the share. The publication of the latest quarterly figures was also received positively by investors. The share outperformed the overall market by 1.9 percent, which led to a further plus point.
Valuation of the Altria share
The valuation of Altria shares can be described as favorable with an expected P/E ratio of 8.9. This assumption is supported in particular by the fact that EPS could continue to rise. A look at the free cash flow multiple could also imply a favorable valuation. The EV/FCF ratio is just 11.
However, there are two points that should give an investor a headache. The first is the relatively weak growth. Over the last twelve months, sales fell slightly by 0.9%. However, the declining momentum in the key volume figures speaks a clearer language and could not bode well for the future.
Problem number two could be the Group's high level of debt. Although the balance sheet showed cash and financial assets of over USD 12 billion in the first quarter of 2024, this is offset by long-term liabilities of over USD 30 billion. In addition, there is a high value of goodwill and intangible assets of USD 20.4 billion.
Conclusion on the Altria share
Altria remains an important player in the tobacco industry despite the erosion of its core business, supported by strong brands such as Marlboro and a deep portfolio. However, the challenges posed by the decline in cigarette consumption and the limited success of new products to date raise questions about the long-term sustainability of the business model.
Altria's efforts to reposition itself through innovation, acquisitions and diversification have not yet produced the necessary breakthrough to justify a re-rating. The company must continue to act strategically in order to secure its market position and generate growth in new segments. Altria's future therefore depends crucially on how successfully it accomplishes this transformation.
The valuation with a single-digit P/E ratio and a high dividend yield may seem justified against this background. Analysts are not unanimous either. There are just as many buy recommendations as hold recommendations (41 percent). Around 18 percent of analysts recommend selling. The average target price of USD 46.87 is just two percent above the last closing price. Viewed soberly, therefore, there appears to be little potential for Altria shares.
Of course, things could look different if the company manages to turn the corner towards more growth. However, from today's perspective, there are no concrete signs of this, which does not mean that an upturn in growth is possible. The focus should be on the development of NJOY in particular.
In this context, an alarm for the Altria share could certainly appear appropriate. A price marker at the historic multi-year lows of USD 35 could be an approach to take a second look at the share. But a marker at the HGI score of nine could also be useful.
