Altria Stock (NYSE:MO)

Investors in Altria Group, Inc. (NYSE:MO) were likely reassured by the company’s last earnings report, which showed a double-digit increase in net revenue and profitability. This demonstrates that the company’s resistance to a more severe macroeconomic downturn was underestimated.

The company also showed its confidence in its ability to create FCF by launching a new $1 billion stock repurchase program after exhausting its previous $1.8 billion authorization. Regardless, an analyst on a conference call predicted a larger repurchase program.

However, management did remind investors that Altria continues to pay a significant dividend (NTM dividend yield: 8.2%) as part of its overall capital allocation strategy. Altria stock has outpaced the market over the last year (1Y total return: 1.87%), therefore income investors are unlikely to have been impacted by the “smaller” new authorization.

Nonetheless, investors should keep in mind that Wall Street experts may not have been as optimistic about Altria’s FY23 prediction as they were (consensus rating: Neutral). According to an analyst on the call, Altria’s “2023 profit projection shows a significantly lower growth rate than (its) 4% to 7% guidance over the prior several years.”

Altria expects an adjusted EPS increase of 3% to 6% in fiscal year 23. Even though it was lower than the more dismal consensus prediction of 3.7%, it was still an improvement. This demonstrated that Wall Street was concerned about how the macroeconomy would harm its premium market position.

Altria did, however, highlight the effects of customers reducing back as the discounted category grew (by 1.4 share points) due to greater inflation, concerns about the overall economy, and increased competition. However, Marlboro increased its premium segment market share to 58.2%, demonstrating that it is the most popular brand with the highest market share in the most profitable segment.

Altria Poised to Benefit From an Economic Recovery

As a result, we believe Altria is still in an excellent position to profit from any potential economic recovery in the second half of 2023 or 2024, as long as the labor market remains solid and consumer spending remains strong.

In our most recent piece, we urged investors to keep an eye on the macroeconomic issues that would make it difficult for Altria to continue shifting towards lower-risk goods.

Our concerns, on the other hand, may have been exaggerated, because the company’s management is confident that it can achieve high adjusted EPS growth in a year fraught with uncertainties.

Investors should consider the more substantial competitive obstacles that could prevent the corporation from exiting its old tobacco business. To compete for market share, the corporation stated that it needed to spend more money on advertising for its smokeless products. According to the company’s management, it has reduced promotional spending in order to enhance profitability and close the “price gap with competitors.”

Investors are likely to pay careful attention to the execution risks connected with the company’s transformation and the performance of its heated cigarette stick joint venture with Japan Cigarette (OTCPK:JAPAF).

Given this, the structural risks of Altria’s transformation route may make it difficult to rerate the business, since Wall Street analysts are likely waiting for more evidence of a long-term recovery.

Considering this, investors should consider if the current opportunity in Altria is compelling enough, given that it is priced comparably to other equities.

Altria’s NTM EBITDA was recently trading at 8.3x, which is much lower than the company’s 10-year average of 11.4x. Nonetheless, it is greater than the 6.5x median of its contemporaries (according to S&P Cap IQ data).

Given that total sales of combustible products have been declining over time, decreasing 7.8% in FY22, the market has likely lowered the risks for Altria and its competitors as they transition away from their heritage categories.

As a result, Altria must outperform the market’s cautious optimism, which investors must consider if its valuation is to rise.

However, the process of Altria bottoming out in September 2022 remains active. As a result, income investors may wish to consider increasing their holdings in Altria stock at present levels.

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