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Altria is Still a Buy After FDA Orders Pulling JUUL Products Off the Market

Shares of Tobacco giant Altria (MO), a significant stakeholder of Juul Labs, slid last week on the news of the FDA preparing to order removing e-cigarette maker Juul’s products from the U.S. market. However, MO rebounded the following day as investors did not foresee any significant impact of this development on the company’s profitability. Given the stock’s strong upside potential from the current price level, MO is still a buy. Read on...

Altria Group, Inc. (MO) and its subsidiaries manufacture and sell smokable and oral tobacco products in the United States. Its portfolio includes cigarettes under the Marlboro brand; cigars and pipe tobacco under the Black & Mild brand; moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands; and on! oral nicotine pouches.

On June 23, 2022, The U.S. Food and Drug Administration (FDA) ordered vaping company Juul Labs to pull its e-cigarettes off the American market. MO, a significant stakeholder of Juul since 2018, witnessed a price decline the prior day on the news of the FDA’s preparation for the order. However, since MO still generates almost 85% of its profit from traditional cigarettes, investors’ expectation of an insignificant impact of this development on MO’s profit helped the stock rebound quickly.

On April 28, 2022, Billy Gifford, MO’s CEO, said, “We reaffirm our guidance to deliver 2022 full-year adjusted diluted EPS in a range of $4.79 to $4.93. This range represents an adjusted diluted EPS growth rate of 4% to 7% from a $4.61 base in 2021.”

Over the past year, MO has lost 8.5% to close the last trading session at $43.40. The stock has lost 8.4% year-to-date and 18% over the past month. However, Wall Street analysts expect the stock to hit $54.92 in the near term, indicating a potential upside of 26.5%.

Here is what could shape MO’s performance in the near term:

Mixed Financials

For the first quarter ended March 31, 2022, MO’s net revenues came in at $5.89 billion, down 2.4% year-over-year. However, its operating income came in at $2.88 billion, up 7.2% year-over-year. Its net earnings came in at $1.96 billion, up 37.6% year-over-year. Also, its EPS came in at $1.08, up 40.3% year-over-year.

Solid Profit Margins

MO’s trailing-twelve-month gross profit margin of 66.57% is 99.4% higher than the industry average of 33.39%. Its trailing-twelve-month EBIT margin and EBITDA margin of 57.67% and 58.78% are also higher than the industry averages of 8.40% and 12.14%, respectively.

Furthermore, MO’s trailing-twelve-month net income margin of 14.30% is 179% higher than the industry average of 5.13%. Its trailing-twelve-month ROTA of 7.48% is 58.4% higher than the industry average of 4.72%.

Favorable Analyst Estimates

Analysts expect MO’s revenue to increase marginally year-over-year to $21.29 billion in 2023. Its EPS is estimated to increase 5.2% in the current year and 5.4% next year. Moreover, its EPS is expected to grow 5.5% per annum for the next five years. It surpassed EPS estimates in three of the trailing four quarters.

POWR Ratings Reflect Promising Outlook

MO has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has an A grade for Quality, consistent with its higher-than-industry profit margins.

The stock has a C grade for Growth, at par with its mixed financials. Also, it has a C grade for Stability, in sync with its 24-month beta of 0.75.

In the 10-stock Tobacco industry, MO is ranked #3. The industry is rated A.

Click here to see more of MO’s component grades (Value, Momentum, and Sentiment).

View all the top stocks in the Tobacco industry here.

Bottom Line

MO’s revenue has grown at a CAGR of 2.9% over the past three years. Moreover, despite certain drawbacks related to its Juul investment, MO’s profitability margins are robust. Given its upside potential, I think MO is a solid buy-the-dip candidate.

How Does Altria Group, Inc. (MO) Stack Up Against its Peers?

While MO has an overall POWR Rating of B, one might consider looking at its industry peers, Imperial Brands PLC (IMBBY), Vector Group Ltd. (VGR), and Japan Tobacco Inc. (JAPAY), which have an overall B (Buy) rating.

MO shares were trading at $43.51 per share on Monday morning, up $0.11 (+0.25%). Year-to-date, MO has declined -4.79%, versus a -17.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.


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