Altria Group (MO) Investors are Being Blind to the Risks - Barron's
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Shares of Altria Group Inc. (NYSE: MO) are under pressure early Tuesday following a cautious Barron's article over the weekend.
With a 5.5 percent yield and shares up 20 percent last year and 50 percent over the past two years, investors reaching for yield "have largely ignored the risks accompanying Altria and its rivals in the tobacco business," Barron's said.
The fact is U.S. cigarette sales are in a severe long-term decline, Barron's noted. Shipments are down a third over the past decade and in 2011 cigarette volumes fell an estimated 3.8 percent.
Altria and the others have been able to offset slowing volume with increased prices, which are up nearly 35 percent over the last decade.
However with smokers' demographic changed, the industry is more and more reliant on those who can least afford the habit and young people taking up smoking has plummeted to the lowest levels in a decade. This is in addition to public smoking bans in 30 states and other restrictions.
In addition, investors need to be mindful of increased regulatory uncertainty with the imminent release of FDA public comments on the health impact of menthol cigarettes.
Investors also need to watch for a potential price war, with Altria's top-selling Marlboro brand losing share to less-expense cigarettes. In April 1993, Marlboro cut prices by 20 percent to reclaim market share. While there are no signs of a price cut of this magnitude, with cheap smokes stealing share, any price cut could hit the stocks.
Despite the numerous concerns investors are "unfazed," Barrons said. Stocks in the tobacco group are trading at multiples of EV/EBITDA between 9x and 10x, or a full point higher than the five-year average. Stocks also look lofty with double-digit P/E ratios and earnings growing at only single-digits rates with most of the growth coming from cost cuts.
With Altria dependent on the U.S. market after spinning off Philip Morris International in 2008, it is very vulnerable, Barron's said. Shares are pricey by almost any measure, the publication said. At a recent price of $30 per share, shares are trading at 14x the consensus for next year. An analyst from Morgan Stanley sees 11x as a better multiple, or $25 per share, suggesting 15 percent downside.
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With a 5.5 percent yield and shares up 20 percent last year and 50 percent over the past two years, investors reaching for yield "have largely ignored the risks accompanying Altria and its rivals in the tobacco business," Barron's said.
The fact is U.S. cigarette sales are in a severe long-term decline, Barron's noted. Shipments are down a third over the past decade and in 2011 cigarette volumes fell an estimated 3.8 percent.
Altria and the others have been able to offset slowing volume with increased prices, which are up nearly 35 percent over the last decade.
However with smokers' demographic changed, the industry is more and more reliant on those who can least afford the habit and young people taking up smoking has plummeted to the lowest levels in a decade. This is in addition to public smoking bans in 30 states and other restrictions.
In addition, investors need to be mindful of increased regulatory uncertainty with the imminent release of FDA public comments on the health impact of menthol cigarettes.
Investors also need to watch for a potential price war, with Altria's top-selling Marlboro brand losing share to less-expense cigarettes. In April 1993, Marlboro cut prices by 20 percent to reclaim market share. While there are no signs of a price cut of this magnitude, with cheap smokes stealing share, any price cut could hit the stocks.
Despite the numerous concerns investors are "unfazed," Barrons said. Stocks in the tobacco group are trading at multiples of EV/EBITDA between 9x and 10x, or a full point higher than the five-year average. Stocks also look lofty with double-digit P/E ratios and earnings growing at only single-digits rates with most of the growth coming from cost cuts.
With Altria dependent on the U.S. market after spinning off Philip Morris International in 2008, it is very vulnerable, Barron's said. Shares are pricey by almost any measure, the publication said. At a recent price of $30 per share, shares are trading at 14x the consensus for next year. An analyst from Morgan Stanley sees 11x as a better multiple, or $25 per share, suggesting 15 percent downside.
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Mark on Jan 4, 2012 01:10 PMMark as Spam
dont you ever have an original thought. Please keep rehashing ideas that real reporters have.