Valuation: Altria Group Inc. (MO)

Company Profile:  Altria Group, Inc. (MO) (obtained via Google Finance)

Altria Group, Inc. (ALG) is primarily a holding company. The Company, through its wholly owned subsidiaries, Philip Morris USA Inc. (PM USA) and Philip Morris International Inc. (PMI) are engaged in the manufacture and sale of cigarettes and other tobacco products. ALG’s 89% owned subsidiary Kraft Foods Inc. (Kraft) is engaged in the manufacture and sale of packaged foods and beverages. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary, maintains a portfolio of leveraged and direct finance leases. As of December 31, 2006, ALG had a 28.6% economic and voting interest in SABMiller plc (SABMiller), which is engaged in the manufacture and sale of various beer products. The Company operates in five segments: domestic tobacco, international tobacco, North American food, international food and financial services. On March 30, 2007, the Company completed the spin-off of Kraft to ALG’s shareholders.

Business and Management Review
1) Is the business simple and understandable?
Altria has a very simple business to understand. The sale of tobacco related products are simple consumer consumption products and are not complicated, nor sophisticated. Altria’s ownership in Phillip Morris Capital Corporation is an investment firm that invests in leveraged and direct finance leases.  

2) Does the business have a consistent operating history?
This firm has a very consistent history in terms of operation. The sale of cigarettes has obviously been a strong seller throughout the years. Further, even with the domestic anti smoking trend the company has managed to make up for the loss of domestic sales with an increase in international sales. Financially the firm has a strong history in terms of earnings and dividend payments.  

3) Does the business have favorable long term prospects?
Domestically the company has more than likely seen their best days for their tobacco unit, but internationally there is still great potential for growth. Seeing that Altria is large enough that they could potentially acquire companies in different sectors we feel that the company will continue to see growth.

4) Is management rational?
There is no reason to suspect that management is not rational in their decision making process. They clearly saw that holding Kraft was not in the best interest for the firm as a whole and thus spun that firm.

5) Is management candid with its shareholders?
Investor relations are strong and all relevant information is presented clearly and effectively.

6) Does management resist the institutional imperative?
Looking at both the management team and board of directors there seems to be a diverse group of individuals and we are not concerned with them not resisting this urge.

Financial and Value Review

Defensive:
1) Size of firm
The firm is above $2 billion in market capitalization. Pass

2) Strong financial condition
With a current ratio of roughly 1 the firm falls below the required ratio of 2. Fail

3) Earnings stability
Altria has had positive net income for the past ten years and we are comfortable with the stability of earnings. Pass

4) Dividend record
Dividends have been paid for the past ten years. Pass

5) Earnings growth
EPS have grown by 1/3 consistently over the past ten years. Pass

6) Price to earnings analysis
With a P/E ratio of 18(using our Methods), Altria is below the required ratio of 20. Pass

7) Price to assets analysis
P/B is 5.8 for Altria which is significantly higher than the 2.5 requirement. Fail

Overall
With a score of 5/8 Altria fails the test for the defensive investor and should not be included in their portfolio. Particularly the price one would currently pay relative to the book value of the firm is extremely too high for the defensive investor.

Enterprising:
1) Strong financial condition
The current ratio is still not high enough (1.5) to meet the requirement of the enterprising investor. Fail. However, the debt to net current assets ratio is below the requirement of fifty and therefore it passes this test. Pass.

2) Earnings stability
Positive net income has been reported for the past five years. Pass.

3) Dividend record
Altria currently pays a dividend. Pass.

4) Earnings growth
Earnings are greater than five years ago. Pass.

5) Price
The current share price is less than 150% of the net tangible assets. Pass.

Overall
Scoring 5/6 Altria passes the test for the enterprising investor.

Valuation:
We find a fair market price for this firm to be around $60 per share.

Opinion:
Currently Altria is trading in the $70 range and is somewhat overpriced relative to our average valuation. For our defensive investors we would not recommend this security presently. For the enterprising investor, however, closer examination is needed on an individual basis. Is the premium of $10 per share enough to own this stock? We would be comfortable paying for the strong earnings and dividends as well overall outlook for the firm.

None of the staff of ModernGraham.com held a position in Altria at the time of publication.  Also, please read our disclaimer and our methods.

 


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One response to “Valuation: Altria Group Inc. (MO)”

  1. trader7230 Avatar

    I have owned Altria shares since 2001, and have enjoyed a 175% return, and that does not include dividends or my Kraft spinoff shares. The management has done an excellent job enhancing shareholder value and has a long term record in returning cash to shareholders.

    When the credit crunch hit in August, it was one of the few companies that withstood the turmoil and deserves to trade at a much higher valuation than in it currently does. It is far from overvalued on a P/E ratio and has superior management and a great cash flow. This stock should be around $80-$85 next year

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