Altria: Tobacco Market Under Pressure (NYSE:MO)

Funding Thesis

Regardless of the stagnant smoking tobacco market, Altria Group (NYSE:MO) stays a secure firm. Altria shifts inflation to customers, which partially compensates for the market’s drop in quantity. This permits the corporate to earn secure free money circulation to pay a excessive dividend of 8%. Approval of the cope with NJOY will permit Altria to enter a brand new development market and diversify revenues.

Nonetheless, with a present upside of +10% and a dividend yield of 8%, we don’t assume it’s value dashing to purchase. It’s higher to achieve a place in installments on the correction within the firm’s share worth.

State of affairs round JUUL

We excluded JUUL Labs from the estimation of the corporate’s truthful worth, given the litigation and the carrying worth of Altria’s stake in JUUL. As a reminder, JUUL didn’t show to be a worthwhile funding for Altria. Altria paid $12.8 bln for the stake in 2018. Over time, the carrying worth of that stake has been lowered to $250 mln.

At this second, Altria has exchanged all the JUUL stake for a non-exclusive, irrevocable world license to sure of JUUL’s heated tobacco mental property. Because of that deal, Altria recorded a non-cash lack of $250 mln on the disposition of the JUUL stake in 1Q 2023.

The corporate didn’t document an asset related to this mental property on its steadiness sheet because it decided that the truthful worth of the mental property was not materials to the corporate’s monetary statements. The first drivers of this conclusion have been that Altria’s rights to the mental property have been non-exclusive and there wasn’t any switch of a product or know-how related to the mental property.

Smoking tobacco market

The development for smoking much less tobacco continues within the US. In 1Q 2023 the whole quantity of the cigarette market fell to 39.8 bln items (-9% y/y). Altria’s share additionally dropped, reaching 47% (-1.1 pp y/y).

Over 2022, the US tobacco market decreased to 180.36 billion cigarettes, in accordance with our estimates, or by 8% y/y. Altria attributed that decline to excessive gasoline costs and inflation in a variety of different items. Nonetheless, the smaller quantity was offset by a 9.4% improve within the common worth of a cigarette pack in 2022.

The development of a shrinking smoking tobacco market continues in 2023. The smoking tobacco market fell by 9% y/y in 1Q 2023, in accordance with our estimates, whereas Altria’s common worth for a pack of cigarettes climbed by 8.8% y/y, which is lower than the common improve in 2022 because the broader US inflation can also be slowing. Presently, Altria attributes the decline of the smoking tobacco market to persistently excessive inflation and falling private actual incomes, making no point out of US gasoline costs, which at the moment are considerably decrease in comparison with final 12 months.

In actuality, tobacco is a staple good, and at any time when actual incomes fell, individuals usually did scale back their tobacco consumption when it comes to amount, however fairly switched from costlier manufacturers to cheaper ones. The true motive why volumes are falling is the development for tobacco consumption to shift towards much less dangerous options equivalent to chewing tobacco and e-cigarettes. In line with Statista, the smoking tobacco market will nonetheless develop in 2023 when it comes to its cash worth, however half of that development might be pushed by the rising consumption of e-cigarettes (of the extra $1.1 billion in gross sales of smoking tobacco, $0.64 billion are anticipated to come back from e-cigarettes gross sales, at the same time as e-cigarettes make up simply 8% of the whole market).

We’re decreasing our forecast for the amount of the smoking tobacco market from 174.6 bln cigarettes (-3.2% y/y) to 164.1 bln cigarettes (-9% y/y) for 2023 and from 169 bln cigarettes (-3.2% y/y) to 155.9 bln cigarettes (-5% y/y) for 2024.

Monetary outcomes outlook

Because of the decrease forecast for the amount of the US tobacco market, we’re chopping the forecast for Altria’s income from 25.5 bln(+1.6% y/y) to 23.9 bln (-4.8% y/y) for 2023, and from 25 bln (-2% y/y) to 22.9 bln (-4.2% y/y) for 2024.

Given the lowered income forecast, we’re decreasing the EBITDA forecast from $13 147 mln (+8.2% y/y) to $12 192 mln (+0.4% y/y) for 2023 and from $13 153 mln (+0% y/y) to $12 094 mln (-0.8% y/y) for 2024.

Valuation

We worth the corporate by averaging the outcomes of two strategies: EV/EBITDA and FCF Yield. The EV/EBITDA methodology helps us to higher worth an organization as a enterprise that has a stake in different companies. The FCF Yield methodology helps us to worth an organization each from a enterprise perspective and from a quasi-bond perspective. Altria pays a excessive dividend yield with stagnant monetary outcomes. Because of this, many buyers seemingly view the corporate as a quasi-bond.

Primarily based on the brand new assumptions, we’re sustaining the score for the shares at HOLD. The truthful worth worth for the inventory is $50.6.

Conclusion

Regardless of the stagnation of the tobacco business, Altria stays a secure funding in a turbulent interval within the markets and in anticipation of a future U.S. recession. A excessive dividend yield of 8% protects the inventory from excessive drawdowns. Nonetheless, the present upside on the inventory is just too low to achieve on the corporate long run.

Because the tobacco business is commonly topic to new regulation amidst the rising function of inexperienced initiatives, the funding carries attendant dangers. For instance, one of many most important dangers is the banning of menthol cigarettes by the authorities, which act as essentially the most frequent taste within the U.S. An extra danger is the potential disapproval of the acquisition of NJOY or disapproval of their new merchandise from the FDA, which might make the acquisition of the corporate unreasonably costly.

Nonetheless, if the deal is profitable, it will open up a brand new client marketplace for Altria.

We advocate to not rush to purchase at present costs and to attend for correction in securities to achieve place by parts