Company Reports

Wide-moat Altria reported first-quarter results with few surprises. Net revenue declined 2.5% year over year to $5.6 billion, mostly from lower cigarette volumes and higher promotion partially offset by higher prices. Adjusted diluted EPS declined by a similar rate to $1.15. Still, the company maintained full-year adjusted diluted EPS guidance of $5.05-$5.17, which implies growth of 2.5% to 4%. This outlook remains reasonable to us, as the back half of the year should benefit from two additional shipping days and the company laps the NJOY acquisition. We don’t expect to make a significant change to our fair value estimate of $49 per share and think shares remain undervalued.

Altria is the leading tobacco manufacturer in the United States. In fact, with Philip Morris International owning the international rights to Marlboro, the US is currently Altria's only market, resulting in more concentrated regulatory risk than for the other major tobacco players, which are multinational. We think it is logical, in the face of that risk, that Altria is pursuing a multiprong approach to cigarette substitutes, even though we harbor doubts about the long-term profitability of some of the emerging categories.

Altria is the leading tobacco manufacturer in the United States. In fact, with Philip Morris International owning the international rights to Marlboro, the U.S. is currently Altria's only market, resulting in more concentrated regulatory risk than for the other major tobacco players, which are multinational. We think it is logical, in the face of that risk, that Altria is pursuing a multiprong approach to cigarette substitutes, even though we harbor doubts about the long-term profitability of some of the emerging categories.

Altria reported 2023 adjusted earnings per share of $4.95, slightly better than our forecast and close to the midpoint of guidance, but cigarette volume was again a little light. The upside to earnings was driven by lower operating costs, which indicates sound execution but does not solve the accelerated volume decline rate, the key concern for investors in U.S. tobacco. We retain our $52 per share valuation and our wide moat rating. The stock was trading at 8 times the midpoint of 2024 earnings guidance during early trading on Feb. 1, implying a dividend yield of 10%, which we believe undervalues the cash flows the business is likely to generate in the future.

Altria reported third-quarter earnings per share of $1.19, in line with our estimate, but volume and revenue were a little light. Investors reacted negatively, with the stock down 8% in the day's trading following the release of results, most likely in response to management's effective lowering of full-year earnings per share guidance to a range of $4.91 to $4.98 to $4.89 to $5.03. The cigarette industry volume decline continues to be faster than its historical trend, and the imminent ban on menthol cigarettes could further accelerate that decline. However, the stock was trading at 8 times the midpoint of 2023 earnings guidance at the close of trading on Oct. 26, implying a dividend yield of 10%, which we believe undervalues the cash flows the business is likely to generate in the future. Although we have lowered our full-year earnings estimate by $0.02, this has no valuation impact and we retain our $52 per share valuation and our wide moat rating.

Altria is the leading tobacco manufacturer in the United States. In fact, with Philip Morris International owning the international rights to Marlboro, the U.S. is currently Altria's only market, resulting in more concentrated regulatory risk than for the other major tobacco players, which are multinational. We think it is logical, in the face of that risk, that Altria is pursuing a multiprong approach to cigarette substitutes, even though we harbor doubts about the long-term profitability of some of the emerging categories.

Altria is the leading tobacco manufacturer in the United States. In fact, with Philip Morris International owning the international rights to Marlboro, the U.S. is currently Altria's only market, resulting in more concentrated regulatory risk than for the other major tobacco players, which are multinational. We think it is logical, in the face of that risk, that Altria is pursuing a multiprong approach to cigarette substitutes, even though we harbor doubts about the long-term profitability of some of the emerging categories.

Altria reported second-quarter results that were a whisker below our forecasts, while margins improved slightly, representing a decent performance in light of tighter tobacco regulation in the United States and increasingly challenging macroeconomic conditions. The headline numbers of revenue net of excise tax up 1.5% year over year and earnings per share growth of 4% are representative of what we believe Altria can deliver in the medium term, and we are retaining our $52 per share fair value estimate and our wide moat rating. The current market price offers moderate upside to our valuation, and we think Altria could provide a fairly attractive defensive holding, paying a dividend yield of 8%, although the concentration in the U.S. market may increase risk and volatility relative to competitors such as Philip Morris International and British American Tobacco.

Altria reported $1.00 in earnings per share in the first quarter of 2023, a whisker above our estimate in spite of weaker cigarette volumes than we had anticipated. A robust gross margin performance, in spite of higher manufacturing and distribution costs, accounted for the upside to our estimates, confirmation of our thesis that Altria will offer defensive qualities in the event of a deterioration in the health of the U.S. consumer. We retain our wide moat rating and $52 per share fair value estimate.

Altria has shifted gears in its strategy to operate in the U.S. vaping category with the announcement that it will acquire U.S. vape manufacturer Njoy Holdings for an initial $2.75 billion and will swap its remaining equity interest in Juul Labs for nonexclusive rights to Juul's heated tobacco intellectual property. We are retaining our $52 fair value estimate, implying 10 times 2023 earnings, based on low-single-digit revenue growth and slowly fading margins. These transactions do not materially affect those forecasts, and Altria itself did not change its guidance for this year, but we view the acquisition positively from a strategic point of view because it keeps Altria's real options alive as the industry shifts from cigarettes to substitute categories.

Altria is the leading tobacco manufacturer in the United States. In fact, with Philip Morris International owning the international rights to Marlboro, the U.S. is currently Altria's only market, resulting in more concentrated regulatory risk than for the other major tobacco players, which are multinational. We think it is logical, in the face of that risk, that Altria is pursuing a multiprong approach to cigarette substitutes, even though we harbor doubts about the long-term profitability of some of the emerging categories.

Altria again reported weak cigarette volume in the fourth quarter of 2022, but this was offset by strong price/mix, which meant the company reported revenue that was in line with our forecast and adjusted earnings per share of $1.18, $0.02 above our estimate. Although guidance for 2023 implies little change from prevailing trends, we have concerns over the spending power of the U.S. consumer, and we expect a more balanced approach to pricing strategies this year. We are leaving our $52 per share fair value estimate intact, and following the positive reaction to the update, the shares trade at a 10% discount to our fair value as at the close of trading on Feb. 1, a fairly modest margin of safety.

Altria reported weak cigarette volume and revenue in the third quarter of 2022, although positive mix meant that operating income of $3.1 billion and earnings per share of $1.28 were in line with our estimates. Of more significance, the company announced a strategic partnership with Japan Tobacco to commercialize heated tobacco in the U.S. Neither third-quarter performance nor the joint venture with JT have an impact on our fair value estimate of $52, and we reiterate our wide moat rating. Altria appeared somewhat undervalued at the close of business on 31 Oct. 31 and we expect the strength in its pricing power, evident again in the third quarter, to ensure Altria's business is defensive in the event of a recession in the U.S.

Altria, the leading U.S. cigarette manufacturer, and Philip Morris International have reached an agreement under which Altria will forgo the exclusive rights to commercialize iQOS, PMI's heated tobacco brand, in the U.S. from April 2024 in return for payments totaling $2.7 billion. In other news, PMI has increased its offer for Swedish Match to SEK 116 per share, representing a total acquisition value of roughly USD 16 billion. Neither of these events affect our fair value estimates for either company, and we retain our USD 52 and USD 103 per-share valuations of Altria and PMI respectively. While both stocks are around 15% undervalued, we believe PMI is the higher-quality business, with global leadership in the heated tobacco category, and it may unlock value by distributing iQOS in the U.S. through Swedish Match distribution infrastructure.

Altria, the leading U.S. cigarette manufacturer, reported second-quarter results for fiscal 2022 that missed our EBIT forecasts by a whisker. Management maintained guidance for the full year, and we reiterate our $52 per share fair value estimate. Although the economic outlook is darkening in the U.S., Altria may prove to be a relatively safe shelter from commodity cost inflation, and there is upside to our valuation as at the close of business on July 28.

The U.S. Food and Drug Administration, or FDA, may be about to drive the final nail into the coffin of Altria's investment in Juul Labs, after The Wall Street Journal reported on June 22 that the U.S. regulator is likely to order the removal of all remaining Juul products from the U.S. market. We have long been skeptics of Juul's outlook, and our $52 per share fair value estimate of Altria assumes Juul would barely be profitable throughout our forecast period. Therefore, the removal of Juul's contribution to Altria's earnings, which Altria reports as equity income, has no impact on our valuation. Although the 9% decline in the share price following the report seems like an overreaction, it probably reflects the deflation of optimistic assumptions around Juul and surprise at the blanket ban, as well as a reminder of the regulatory risk that accompanies investments in the tobacco sector. Our capital allocation rating of Altria remains Poor.

Philip Morris International and Swedish Match (not covered) have confirmed talks are ongoing between them regarding a potential acquisition of Swedish Match by Philip Morris. Financial terms were not disclosed but we suspect there is little wiggle room for a deal to create value at a price above Swedish Match's market cap of SEK 123 billion at the close of business on May 9. However, we do think there could be strategic and financial benefits from the access to the U.S. market that Philip Morris would gain. We retain our USD 103 fair value estimate for Philip Morris but will review this depending on whether the deal closes and on what financial terms.

Altria reported first-quarter results that were very close to our forecasts, and we retain our $52 fair value estimate. We remain comfortable with both our near-term estimates, which are at the midpoint of management's earnings guidance on an adjusted basis, and our long-term forecasts, which assume flat revenue and modestly eroding gross margins over time. After a rerating in the stock since late 2021, Altria is now trading at our fair value estimate. However, with its 10% interest in Anheuser-Busch InBev remaining materially below our estimate of intrinsic value, the implied expectations for Altria's core tobacco business now look slightly frothy.

Altria is no longer a pure play on U.S. cigarettes. Over 15% of our valuation is derived from its 10.2% share of Anheuser-Busch InBev, and of the consolidated business, 14% of EBIT came from oral tobacco in 2021, while recent acquisitions in vaping and cannabis are likely to be contributors to EBIT in the near future. Nevertheless, U.S. cigarettes remains the driver of Altria's earnings, because following the breakup of Philip Morris in 2008, Altria operates solely in the U.S., while Philip Morris International, or PMI, owns the rights to the brands elsewhere.

Altria reported fourth-quarter results that were close to our forecasts, and we are retaining our $52 fair value estimate. 2022 earnings per share guidance of $4.79-$4.93 implies modest upside to our current estimates, although the pace of the share-repurchase program appears to account for most of this. With Altria now trading very close to our fair value estimate, we are not convinced the repurchase program will create much value for shareholders. A more significant long-term value driver, in our view, is Altria's ability to market IQOS in the U.S., and we were slightly disappointed by the announcement that Altria does not expect to commercialize the heated tobacco product in 2022.