Co-produced with PendragonY

The Business

Each business goes through several stages. First, there’s the introduction stage. When the business picks up, it becomes the growth stage. Following that, it reaches cash cow stage whereby the growth is lower, but the company is generating high enough cash to be able to reward shareholders. This is where Altria (MO) is today. In this case, MO is able to reward shareholders with very high dividends.

Altria is a tobacco company owning the U.S. rights to many of the most popular brands like Marlboro, Benson & Hedges, Parliament, and Virginia Slims. The revenues from these brands make it one of the largest tobacco companies in the U.S. with its headquarters in Richmond, Virginia. While it has investments outside of tobacco, most notably Anheuser-Busch-Inbev (BUD), Cronus Group (CRON), and JUUL, it still gets approximately 85% of its revenue from cigarettes. “I Quit Original Smoking” (or IQOS) is a new heat-not-burn tobacco product that’s also seeing significant investment from Altria.

In past articles on Altria, we have pointed out that tobacco companies have typically had improving stock prices when the economy struggled. This year has proven to be the exception to that rule. And while MO share prices declined along with the rest of the market in late February and March, it also has been slower than the rest of the market to recover from those declines. If the company’s operations have recovered, this lack of share price recovery is an opportunity.

So how has the share price done?

Here’s how the share price of MO compared to the S&P 500 during the initial market reaction to the COVID-19 crisis from Feb. 17 to April 30:

ChartData by YCharts

So MO crashed pretty much in line with the market as a whole and

We believe there may be a good opportunity with Altria stock (NYSE: MO) at the present time. MO trades at $39 currently and is in fact down 16% so far this year. It traded at a pre-Covid high of close to $44 in February, and is still 11% below that level now. MO stock has gained 33% from the low of $29 seen in March 2020, less than the S&P 500 which is up 50% from its March lows. MO stock has underperformed the broader market because the drop in the stock when the crisis hit was less than the market, as it belongs to the defensive sector of tobacco. That said, with the lockdowns being lifted, supply constraints are likely to ease leading to higher volume sold. Also, the expectations of rising sale of IQOS e-cigarettes in the US is likely to boost revenues and margins. This could take the stock to $48 – well beyond its February peak – reflecting a potential upside of more than 20%. Our conclusion is based on our detailed comparative analysis on Altria stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

  • 12/12/2019:  Coronavirus cases first reported in China
  • 1/31/2020:  WHO declares a global health emergency.
  • 2/19/2020:  Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020:  S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 50% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity