Altria (MO) reported another robust performance at the top line in the fourth quarter of 2020. Although we are not changing our $54 fair value estimate, this performance increases our conviction that Altria is undervalued.
Full-year 2020 net revenue grew by 5.3%. This is a rate some other large cap fast-moving consumer goods companies, trading at much higher valuations, can only dream of in the current environment. Even making allowances for what seem likely to be higher channel inventory levels, we estimate revenue grew by almost 4%. Cigarette volumes fell by 0.4% (and by around 3% on an underlying basis, in line with the third quarter), and oral tobacco volumes were also down only very modestly, implying almost 6% price/mix across the portfolio last year. This is a strong performance for two reasons. First, cigarette volumes have been robust in spite of the disruption caused by COVID-19. We believe smokers are consuming more at home than they would if they had been in the office, and this has been confirmed by other commentary and data points by other cigarette manufacturers. While this tailwind may ease after the pandemic is under control, economic stimulus measures in the U.S., which seem likely to continue under the new Democrat-dominated government, have also supported the spending of low-income workers. Second, mid-single-digit price/mix contradicts the notion, misplaced in our view, that the tobacco algorithm is broken. Volumes in 2020 were no doubt supported by consumers switching back to cigarettes from vaping, and Altria estimates the vaping category fell by 10% in 2020. We expect the decline rate to revert to the high end of historical norms of around 3.5%, once that impact is cycled. This should ensure that Altria can grow its top line at a low-single-digit rate in the medium term, and we believe this is not being fairly priced into the company's market value.
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