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Altria Group Inc. (MO) Annual Valuation

moneyCompany Profile (obtained from Google Finance): Altria Group, Inc. is a holding company. At December 31, 2012, Altria Group, Inc.’s direct and indirect wholly owned subsidiaries included Philip Morris USA Inc. (PM USA), which is engaged in the manufacture and sale of cigarettes and certain smokeless products in the United States; John Middleton Co. (Middleton), which is engaged in the manufacture and sale of machine-made cigars and pipe tobacco, and is a wholly owned subsidiary of PM USA; and UST LLC (UST), which through its direct and indirect wholly owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (USSTC) and Ste. Michelle Wine Estates Ltd. (Ste. Michelle), is engaged in the manufacture and sale of smokeless products and wine. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held approximately 26.9% of the economic and voting interest of SABMiller plc (SABMiller).

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Opinion Overvalued
Value Based on 3% Growth $30.33
Value Based on 0% Growth $17.78
Market Implied Growth Rate 4.60%
Net Current Asset Value (NCAV) -$12.21
PEmg 17.70
Current Ratio 0.91
PB Ratio 18.61

Balance Sheet – 9/30/2013 

Current Assets $7,549,000,000
Current Liabilities $8,337,000,000
Total Debt $12,892,000,000
Total Assets $35,950,000,000
Intangible Assets $17,237,000,000
Total Liabilities $31,969,000,000
Outstanding Shares 2,000,290,000

Earnings Per Share

2013 (estimate) $2.58
2012 $2.07
2011 $1.64
2010 $1.87
2009 $1.54
2008 $1.48
2007 $4.33
2006 $5.71
2005 $5.10
2004 $4.57
2003 $4.52

Earnings Per Share – ModernGraham 

2013 (estimate) $2.09
2012 $1.81
2011 $1.84
2010 $2.29
2009 $2.88
2008 $3.77

Conclusion:

Altria Group is a company that Defensive Investors and Enterprising Investors should shy away from for the near future.  The company has a poor current ratio, has not achieved sufficient growth over either the 5-year or 10-year historical period, and is trading at a high PB ratio.  Value investors seeking to follow Benjamin Graham’s methods should seek other opportunities, starting with a review of companies that pass the ModernGraham requirements.  From a valuation perspective, the company’s poor level of growth over the last 5 years does not support much of a value.  EPSmg (normalized earnings) have actually dropped from $2.88 in 2009 to an estimated $2.09 for 2013.  This indicates that any value must come from the balance sheet, rather than the earnings, but the net current asset value is also very poor for this company.  Therefore, the company would appear to be overvalued presently.

What do you think?  What value would you put on Altria Group (MO)?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Altria Group (MO) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

2 thoughts on “Altria Group Inc. (MO) Annual Valuation

  1. MO spun off PM in 2008, so 10 yr EPS is kind of tricky. Can’t agree that MO has not grown EPS sufficiently in last five years.

    1. Thanks for the comment! I agree that EPS is tricky due to the spin-off. The problem with spin-offs and the ModernGraham approach is that one of the key tenets of Graham is to avoid speculating, and it is extremely difficult to avoid speculation when you’re talking about historical performance of companies that have recently gone through a split like this.

      As a result, it is important to use the data that is available when analyzing companies. That data shows that MO’s EPSmg (normalized earnings based on a weighted average of five years of earnings data) has dropped from $3.77 in 2008 to an estimated $2.09 for 2013. It is possible that those figures may be stronger for MO if you take out the pre-2008 earnings that were attributable to PM, but doing so requires speculating about how MO would have done during that time on its own. I’d rather be wrong and miss out than be wrong and lose money.

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