Altria (Big MO)

This week I purchased some Altria (MO).  This is a stock I owned 20 years ago and it was a mistake to sell it when I did.  Altria manufactures and sells cigarettes, smokeless products, and wine in the United States. They also have a 10.2% interest in Anheuser-Busch InBev (World’s largest brewing company), a 35% interest in JUUL (#1 non-traditional smoking products company) and a 45% interest in Cronos Group (Canadian marijuana grower). Altria was founded in 1822 and is headquartered in Richmond, Virginia.

Although smoking has been on a steady decline for decades, Altria has delivered a 16% annual return over the past 30 years.  This compares to 9.5% for the overall stock market.  If you invested $10,000 in the S&P 500 30 years ago, you would have $152,200 today.  If instead you invested in Altria, you would have $858,500.
 
What I like about Altria:

• Industry leader with ~50%+ market share.
• Very impressive margins (2019 operating margin was 42.7%).
• 9% dividend yield – They have increased the dividend 54 times in the past 50 years.
• They own the Marlboro brand - #1 brand for 45 years.
• Significant pricing power – They have been able to offset roughly 80% of volume declines with higher prices.  Buffett will tell you if there is just one thing to look for in judging the quality of a business, it would be pricing power.  Very few companies have it.
• High returns on invested capital – Altria’s return is 36%.  The average company is closer to 9%
• Recession proof.  Some would argue people smoke more in a recession.
• Margin expansion.  They have increased their operating margin every year since 2014.  This is something that really impressed my when I looked at their historical financials.  Here are the historical operating margins:

 
2014    31.9%
2015    33.1
2016    35.5
2017    38.3
2018    41.7
2019    42.7
2020    43.0 (est.)
 
 
What I do not like about Altria:

• The industry is in a secular decline
• High legal risks
• High regulatory risks
• High excise taxes
• They overpaid for JUUL and Cronos (in my opinion).  Good news is they already took significant write downs for this.

 
What is Altria worth? 
 
Using a discounted cash flow approach with their current financials and assuming a 2.0% growth rate (conservative), Altria has an enterprise value of $138B.  This does not include the value of their investment in:
 
                              Est Value:
 
AB Inbev (BUD)     $12.0B
JUUL                           4.2B
Cronos                        1.0B
Total investments  $17.2B
 
If you add it all up:
 
Enterprise value                $138.0B
Equity Investments                17.2
Cash                                         5.2            
Less debt                              (30.0)                       
Less pension                           (0.5)
Fair value estimate            $130.0B
Divide by # of shares            1858
 
=Fair value estimate per share $70.00
Today’s price                              $38.60
% Undervalued                             45%                
 
 
 
Disclosure: Long MO
 
Questions or comments, feel free to email me at [email protected]
 
Disclaimer: Askfinanceguy.com is not an investment advisor, brokerage firm, or investment company.  This blog is for educational and/or entertainment purposes only. Use this information at your own risk. Do not consider anything on this page to be legal, tax, or investment advice.