Investment Rating:
Hold
Industry
Sector: Consumer Goods
Industry: Cigarettes
Pricing (As of 10/25/06)
Closing Price
$77.54
52 Week High
$85.00
52 Week Low
$68.36
Security History (As of 9/25/06)
Shares Owned
50
Buy Date
Fall 2005
Buy Price
$54.01
$ Gain*
$1,176.50
Div. per Share
$2.46 or 3.26
Current Value
$3,877
Stop-Loss Price $65
Profit Price
$90
*Not including dividends
Valuation
FY (Dec)
2003
2004
2005
EPS
4.52
4.56
4.99
P/E
12
13
15
Profitability &
Effectiveness (ttm)
ROA
13.22%
ROE
31.09%
Profit Margin
16.27%
Operating Margin 32.57%
Gross Margin
96.47%
Market Data
Total Assets (bil) 25.431
Market Cap (bil) 161.32
Avg. Vol (mil)*
9.41
EPS (ttm)
5.412
P/E (ttm)
14.24
Div & Yield
3.44 (4.2%)
*3m
Altria Group Inc. (MO)
Altria Group is the parent company of Kraft
Foods, Philip Morris International, Philip Morris
USA and Philip Morris Capital Corporation. In
addition, Altria Group, Inc. has a 28.7% economic
and voting interest in SABMiller. The company was
founded in 1902 as Phillip Morris & CO, Ltd. The
company changed its name to Altria Group Inc. in
2003. Altria is considered to be in the Consumer
Goods industry.
General Foods and Kraft Foods were
acquired by Altria. in 1985 and 1988 respectively.
The companies were combined and renamed Kraft
General Foods. Kraft then acquired Jacobs Suchard
AG and Nabisco. The company’s brands include
Kraft Cheese, Maxwell House Coffee, Oreo
Cookies, Ritz crackers, and Tang. It is the second
largest food and beverage corporation in the world,
with a workforce of approximately 94,000
employees. Altria has about an 88% stake in Kraft
Foods.
Phillip Morris International and Phillip
Morris USA are both wholly owned by Altria
Group. Phillip Morris USA is the largest cigarette
company in the United States. Its brands include
Marlboro, Virginia Slims, Parliament, and Basic.
Phillip Morris International is the most profitable
international cigarette
company. It owns
k
% seven of
the twenty best-selling international brands of
cigarettes.
Philip Morris Capital Corporation actively
manages a portfolio consisting of leveraged and
direct finance leases. It provides Altria Group, Inc.,
with financial, tax and economic benefits while
managing a well-diversified portfolio of assets. 1
SABMiller is the world’s second largest
brewing company. Its’ major brand is Miller Beer.
The company is a result of a merger between Miller
Brewing Company and South African Breweries
plc. 1
Andrew Winkler
Abw023@mizzou.edu
______________________________
1
Source for company info: www.altria.com
Market Analysis
Altria has made no secret it plans on selling off its stake in Kraft Foods, placing them
solely in the tobacco industry. It was thought that Altria would take their time making
their decision, but with last Monday’s court decision to certify class status to the “light
cigarette” lawsuit could delay the breakup of Altria by up to 18 months.2 Because of this
pending action, and the fact that Kraft Foods in traded separately, this report will focus
on their continuing tobacco business.
Phillip Morris USA is the leader in domestic cigarette market share, controlling around
50% of domestic sales. Phillip Morris International holds around a 15% global market
share, making it the top international cigarette manufacturer in terms of revenue. 3 While
the domestic cigarette market continues to decline (down 1% in the first half 2), it still
remains huge. The decline in the market is attributed to anti-smoking efforts, restrictions
on smoking, multibillion dollar lawsuits, and the deaths of lifelong customers.
While the domestic cigarette market is declining, the international market continues to
grow (6% last year2). Most of this growth can be attributed to the lack of both
multibillion dollar lawsuits internationally and focus on the negative health effects of
smoking. While Phillip Morris International owns 7 of the 20 top grossing brands, it still
has lots of room to grow in international markets. Phillips Morris has virtually no
presence in China, which houses about 25% of the world’s smokers. 3 Phillip Morris
International’s CEO Andre Calantzopoulos views the world market this way: "While
there will inevitably be bumps along the road, with nearly 85% of the world's adult
smokers outside the USA that we will seek to persuade to switch to our products, I
believe that Phillip Morris International has great potential to continue to expand volume,
share and profitability going forward." 2
When Altria sells off Kraft, they will be able to use the capital to acquire new brands in
markets such as China. Altria has history of breaking into new markets by purchasing
local brands.
The first chart on the following pages gives the growth estimates for Altria compared to
the industry, sector, and S&P 500. Obviously, the cigarette market is not expected to see
high growth rates. The next chart shows how Altria compares to the rest of the industry
on some important ratios.
_____________________________________________________________________________________
2
3
http://biz.yahoo.com/ap/060925/sector_snap_tobacco.html?.v=2
http://biz.yahoo.com/ic/profile/350_1203.html
Source: finance.yahoo.com
Competition
The main public competitors for Altria are British American Tobacco, which produces
Lucky Stripe and Pall Mall, and Reynolds American Inc, which produces Winston,
Camel, Salem, KOOL, and Doral, as well as multiple brands of smokeless tobacco. On
top of those companies, there are multiple discount manufacturers who continue to gain
market share while taxes continue to raise the price of cigarettes. These small discount
manufacturers are also generally not included in the class action lawsuits.
Internationally, multiple brands compete with Altria, most being market specific. This
includes government owned tobacco companies, which are fairly common worldwide.
The big advantage Altria has over their competition is the Marlboro brand, arguably the
most recognized consumer brand in the world. Because of advertising restrictions, it is
doubtful that any other company can compete with Altria from a brand standpoint.
Valuation
To estimate the Risk Premium, I first assumed a Rate of Return of 8.5% (S&P 500
historical return). I then use the 3 month bond yield of 4.75% for the risk free rate. This
leads to a risk premium of 3.75%. The previous Dividend per Share was $3.06. Using a
Beta of 1 for the Dividend Discount Model (Actual is .76 according to Yahoo Finance)
leads to a discount as computed below:
RE = RF + Beta (Equity Risk Premium)
RE = 4.75 + .1(3.75) = 8.5
Because the cigarette market is not predicted to grow at a high rate, but Altria has
consistently paid a quarterly dividend, I have decided to use the Dividend Discount
Model in my valuation.
Dividend Yield
5 year average dividend yield is 4.8% from Yahoo Finance.
V = (3.06*1.048)/(.085-.06) = 128.28
This gave a price above the current value of the stock. The threat of lawsuits can
probably explain the difference in prices. I also used the Damodaran’s Gordon Growth
Model spreadsheet. Because growth rates are predicted to be small, probably not in two
stages, and the company pays its profits in dividends, this model will give a reasonable
valuation. I assumed the actual Beta, risk free rate, and risk premium, and got the other
financial information from Yahoo Finance. I assumed a modest 4% growth rate.
As you can see, this model gives a fairly accurate value for Altria, along with a fairly
accurate dividend for share. If the company can grow at a higher rate, there is the
potential for a large capital gain.
Stock Performance & Ratings
Altria has more or less followed the S&P 500 for the past year.
But Altria has outperformed the S&P 500 greatly over the past two years.
Analysts’ recommendations from Yahoo generally range from buy to strong hold. This is
a chart of Yahoo’s recommendation, but it is on par with everywhere else I have looked.
As you can see, we are still well below the mean and median target prices.
Here are Zacks ratings, from MSN Money. Analysts are pretty polarized. Most still
recommend buying or holding.
Insider Trading
The majority of the companies stock (75%) is owned by institutions and mutual funds.
Very few shares were sold by insiders the past six months, but a large number were
purchased by institutions.
Lawsuits
The only major risk with Altria is the threat of litigation. On September 25, a judge
classified class status to a lawsuit over the cigarette industries marketing of “light”
cigarettes. The case was brought under a fraud claim. Before the class certification,
there was a long string of favorable rulings for the tobacco industry. However,
everything I have read questions if the ruling will survive appeal. If upheld, it will
change a long history of case law. The judge that ruled on the certification has a history
of having his rulings overturned. There is no guarantee this ruling will be overturned, but
most legal experts expect that it will be overturned. If it is not overturned, it is also
believed to be hard to prove, but it will be hard to get a jury to side with tobacco
companies.
Final Recommendation
Even though Altria is not a growth company, it is a cash cow. While there is small
growth and litigation domestically, internationally there is still opportunity for large
growth, especially in markets where Altria isn’t present. The stock fits into our fund
philosophy of value. It especially makes no sense to sell the stock after the market has
already reacted to the class action certification of the “light” cigarette lawsuit.
Everything I have read suggests that this is a strong company to hold. While it might be
optimistic to think the ruling will be reversed, this is a bad time to sell. It may go down
further in the short term, but it should continue to grow in the long run, especially after
Kraft is sold. With the World’s most recognized cigarette brand, and restrictions on
advertising, this is a strong company to hold. Also, Altria will pay a dividend of $0.86 on
October 10.
Recommendation: Strong Hold
Income Statement
Balance Sheet
Cash Flow
Source: Yahoo Finance