Alcohol & Tobacco Stocks

Altria Group Inc Valuation – June 2016 $MO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – June 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Altria Group Inc (MO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Altria Group, Inc. is a holding company. The Company’s subsidiaries include Philip Morris USA Inc. (PM USA), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (Middleton), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and UST LLC (UST), which through its 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 tobacco products and wine. Its segments include smokeable products, smokeless products and wine. The smokeable products segment uses over four manufacturing and processing facilities. The smokeless products segment uses over four smokeless tobacco manufacturing and processing facilities located in Franklin Park, Illinois; Hopkinsville, Kentucky; Nashville, Tennessee, and Richmond, Virginia. Its wine segment uses approximately 11 wine-making facilities.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MO – June 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $131,436,699,567 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.87 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -2.93% Fail
6. Moderate PEmg Ratio PEmg < 20 25.04 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 47.76 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.87 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -11.49 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MO value chart June 2016

EPSmg $2.68
MG Growth Estimate 6.57%
MG Value $57.92
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $38.80
MG Value based on 0% Growth $22.75
Market Implied Growth Rate 8.27%
Current Price $67.02
% of Intrinsic Value 115.70%

Altria Group Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.86 in 2012 to an estimated $2.68 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.27% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Altria Group Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

MO charts June 2016

Net Current Asset Value (NCAV) -$12.18
Graham Number $9.80
PEmg 25.04
Current Ratio 0.87
PB Ratio 47.76
Current Dividend $2.22
Dividend Yield 3.30%
Number of Consecutive Years of Dividend Growth 7

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $7,498,000,000
Total Current Liabilities $8,616,000,000
Long-Term Debt $12,846,000,000
Total Assets $34,063,000,000
Intangible Assets $17,308,000,000
Total Liabilities $31,318,000,000
Shares Outstanding (Diluted Average) 1,956,000,000

Earnings Per Share History

Next Fiscal Year Estimate $3.04
Dec2015 $2.67
Dec2014 $2.56
Dec2013 $2.26
Dec2012 $2.06
Dec2011 $1.64
Dec2010 $1.87
Dec2009 $1.54
Dec2008 $2.36
Dec2007 $4.62
Dec2006 $5.71
Dec2005 $4.99
Dec2004 $4.56
Dec2003 $4.52
Dec2002 $5.21
Dec2001 $3.87
Dec2000 $3.75
Dec1999 $3.19
Dec1998 $2.20
Dec1997 $2.58
Dec1996 $2.56

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.68
Dec2015 $2.41
Dec2014 $2.21
Dec2013 $1.98
Dec2012 $1.86
Dec2011 $1.98
Dec2010 $2.50
Dec2009 $3.16
Dec2008 $4.13
Dec2007 $4.97
Dec2006 $5.10
Dec2005 $4.74
Dec2004 $4.53
Dec2003 $4.38
Dec2002 $4.09
Dec2001 $3.39
Dec2000 $3.06

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – January 2015
Altria Group Inc. Annual Valuation – 2015 $MO
14 Companies in the Spotlight This Week – 1/25/14
Altria Group Inc. (MO) Annual Valuation

Other ModernGraham posts about related companies

Constellation Brands Inc Valuation – January 2016 Update $STZ
Molson Coors Brewing Co. Valuation – November 2015 Update $TAP
Brown-Forman Corporation Analysis – September 2015 Update $BF/B
Brown-Forman Corporation Analysis – June 2015 Update $BF.B
Philip Morris International Annual Valuation – 2015 $PM
Brown-Forman Corporation Quarterly Valuation – March 2015 $BF.B
Lorillard Inc. Quarterly Valuation – March 2015 $LO
Reynolds American Inc. Annual Valuation – 2015 $RAI
Altria Group Inc. Annual Valuation – 2015 $MO
Brown-Forman Corporation Quarterly Valuation – December 2014 $BF.B

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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