Altria (MO)

 ​In July of last year, I posted a blog on Altria.  At that time the stock was trading at $39.40, and I estimated intrinsic value at $70 making the shares 44% undervalued. Today, the shares closed at $47.81 giving you one appreciation of 21.3%, or a total return of 30.7% including dividends. 
 
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 13.2% annual return over the past 25 years.  This compares to 9.8% for the S&P 500.  If you invested $10,000 in the S&P 500 25 years ago, you would have $103,500 today.  If instead you invested in Altria, you would have $221,900.
 
What I like about Altria:

• Industry leader with ~50%+ market share.
• Very impressive margins.
• 7.2% 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.
• Very high returns on invested capital.
• Recession proof.  Some would argue people smoke more in a recession.
• Margin expansion.  They have increased their operating margin 13.5 points since 2014!  This is something that really impressed my when I looked at their historical financials.  Here are the historical operating margins:

 
2014    42.5%
2015    44.4
2016    46.1
2017    49.4
2018    48.4
2019    53.0
2020    52.2
2021 YTD 56.0
 
 
 
 
What I dislike 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 conservative ~2.0% growth rate, Altria has an enterprise value of $136B.  This does not include the value of their investment in:
 
                              Est Value:
 
AB Inbev (BUD)   $14.3B
JUUL                        1.6B
Cronos                       1.2B
Total investments   $17.1B
 
If you add it all up:
 
Enterprise value                $136.0B
Equity Investments               17.1
Cash                                        1.9            
Less debt                             (28.2)                       
Less pension                          (0.6)
Fair value estimate             $126.2B
Shares outstanding               1849
 
Fair value estimate per share $68.25
Today’s price                           $47.81
% Undervalued                             30%                
 
 
 
Disclosure: Long MO
 
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.