Altria Stock (MO): Earnings Estimates Look Upbeat

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The last time we covered Altria Group Inc. (New York Stock Exchange: MO) suggested that the fair value of this stock was lower and that investors would do well to play defensively.

This should be assessed with a terminal value of $0 in 7-10 years and investors should use discounted cash flow analysis to figure out what price makes sense. For us, it’s currently $35 to $37.50 and that number is only going to tend to go down over time. We traded this into our market portfolio and sold the $35.00 Cash Guaranteed Put Options.

Source: The 3 certainties of life

Altria has actually done a little better than we imagined and outperformed both the S&P 500 (SPY) and the Consumer Staples Index (XLP).

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Data by YGraphics

Of course, our cash-secured put options did pretty well, too, and with less than 20% of the volatility of common stock.

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author’s app

That is the great advantage of these options trades. They take the adrenaline out of the market and allow you to capture revenue with a higher level of confidence.

the headwinds

Altria’s EPS was slightly below estimates with a non-GAAP earnings loss of 2 cents. Revenue was more troublesome, coming in at $180 million below estimates. The company lowered its EPS forecast for the year to $4.81 to $4.89 per share.

From the bullish perspective, Altria continues to generate higher earnings per share.

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Presentation of Altria Q3-2022

Even in the face of strong inflationary pressures, Altria has increased its margins.

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Presentation of Altria Q3-2022

That’s two for two for the company. Prestige.

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From the bear cave, its long-term viability depends on its customers, and whether they’re dying to leave or just dying doesn’t look good.

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Presentation of Altria Q3-2022

We have always been more pessimistic than the consensus as to where the rates of decline would go and the numbers continue to be even worse than we expected. Altria’s 10% adjusted decline rates were just an extraordinary blow to any bull case. Total clubs sold dropped to just 21.845 billion.

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Altria Q3-2022

To be clear, this was not always the norm. For example, in 2017, the decline rates were only 2.7%.

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Altria Q1-2017

Assuming we have another year of 9-10% declines, we will have lost over a third of bar volumes in the space of 7 years. Yes, despite everything, Altria has raised prices as if his life depended on it, and yes, profits have grown. Both are reasons why we have stuck to a hold rating and have never sold this name. But those dips are also one of the reasons why Altria’s total return (including those massive dividends) over the last 6 years has trailed XLP’s by quite a wide margin.

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Data by YGraphics

Our conclusion at this point remains the same. There will come a time when price rises will accelerate falls and that will only be apparent in hindsight. In fact, looking at the last 12 to 18 months suggests that we may actually be at that point or even beyond that point. We maintain a cautious outlook and bulls could be suddenly greeted in some quarters where price rises fail to offset volume declines. In that case, the numbers below may seem overly optimistic.

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looking for alpha

Altria’s quarter also saw significant news from the partnership with Philip Morris (PM). In exchange by Payments totaling $2.7 billion, Philip Morris International Y altria reached a agreement in which altria would do to give up the unique Correct a market iQOS, PMI heated tobacco brand, in the United state starting in April 2024.

altria Y P.M parting ways with respect a iQOS was not completely unexpected. Altria has already been paid $1 billion Y Will to receive the final $1.7 billion by the beginning of the Following years second half. Altria is likely to invest close to $500 million to create its own brand of heating tobacco. Starting this from scratch probably makes it harder for the company, but the compensation you’ve received should ease those wounds.

Finally, on the e-cigarette front, Altria’s entire investment in JUUL (JUUL) appears to be headed for zero. Not in a metaphorical sense, but literally in a chicken egg equivalent. JUUL will likely file for your Chapter 11 early. This validated our extremely early and accurate call (see JUUL Of Denial) that this acquisition was an unbelievable disaster. Altria, by redeveloping its e-cigarette capabilities, will also deplete cash flow and limit buybacks and dividend increases.

As of June 30, 2022, the book value of Altria’s investment in JUUL was $450 million. We exercised our option to be released from our non-compete obligations to JUUL on September 29, 2022, resulting in 1) the permanent termination of our non-compete obligations to JUUL, 2) the loss of our board appointment rights JUUL (other than the right to appoint an independent director so long as we continue to own at least 10%), our preemptive rights, our consent rights, and certain other rights with respect to our investment in JUUL, and 3) the conversion of our JUUL shares to single voting common stock, significantly reducing our voting power.

Source: Altria SEC Filing

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Verdict

It’s hard to find fault with the financial numbers Altria has produced this year. It’s also hard to be calm with the way their volumes keep falling. New developments in iQOS will create more work for Altria in the future. We remain cautious and continue to view this as a dangerous investment. Balancing that risk requires only buying at what offers an extraordinary margin of safety and for us that point currently stands at $35.00 per share. Investors who are comfortable believing in the long-term viability of the company may also consider longer-term bonds.

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FINRA

We believe that covered call options or guaranteed cash put options at lower strike prices are actually better and have vastly outperformed common stocks since we began trading them.

Please note that this is not financial advice. It may look like it, it may seem like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their goals and limitations.

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