Shares of Fortune 200 company Altria Group, Inc. (MO) have s gained 19.8% over the past year. The company manufactures and sells cigarettes, oral tobacco products and wine through its subsidiaries, which include Philip Morris USA Inc., John Middleton Co. and UST LLC. And, as the tobacco industry attempts to change for the better, MO is increasing its focus on harm reduction and informed consumer choice.
MO’s stock has declined 9.4% since hitting its peak of $52.38 on April 16 on the rumors that the Biden administration may introduce tougher tobacco-company regulations. However, thanks to its diversified portfolio, the stock is expected to rebound in the coming months.
So, we think the price dip has created a perfect buying opportunity for investors. Furthermore, MO has authorized a $2 billion share repurchase program, which is expected to be completed by June 30, 2022.
Here’s what we think could shape MO’s performance in the near term:
Well-Positioned to Flourish Even Under Tougher Regulations
Several reports have surfaced over the past few days that the Biden administration may force tobacco companies to slash the level of nicotine content in cigarettes. The U.S. Food and Drug Administration (FDA) is also expected to rule on menthol cigarettes by the end of this month. MO is well-positioned to thrive even under tougher tobacco regulations because its portfolio also includes non-combustible products, and the company has investments in leading products across heat-not-burn, moist smokeless tobacco and oral nicotine pouches, and the e-vapor segments.
In fact, in December 2020, the FDA authorized the commercialization of the next generation of the IQOS tobacco heating system devices, the IQOS 3. MO is preparing for a time when adult smokers will choose non-combustible tobacco products over cigarettes, which is an important part of its 10-year vision.
Robust Financials
For the fiscal 2020 fourth quarter, ended December 31, 2020, MO’s revenue from the smokable products segment increased 7.9% year-over-year to $5.57 billion, while its revenue from the oral tobacco products segment increased 4.5% year-over-year to $632 million. Its revenues, net of excise taxes, climbed 5.3% year-over-year to $5.06 billion in the fourth quarter.
The company’s operating income for the quarter was $2.58 billion, up 6.3% year-over-year. MO’s net earnings came in at $1.92 billion compared to a net loss of $1.81 billion in the prior-year period.
Consensus Price Target Indicates Solid Upside
MO is currently trading at $47.22 and Wall Street analysts expect the stock to hit $52.63 in the near term, which indicates a potential upside of 11.5%.
POWR Ratings Show Promise
MO has an overall B rating, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, MO has a B grade for Momentum. This is consistent with its 22.4% gains over the past six months and 11.8% returns over the past three months.
The stock has an A grade for Quality, which is sync with its trailing-12-month 64.7% gross profit margin, which is much higher than the 35.4% industry average. Its 98.4% trailing-12-month return on common equity and 9.4% trailing-12-month return on total assets are also higher than their respective industry averages.
MO is ranked #4 of 11 stocks in the A-rated Tobacco industry. Click here to access MO’s ratings for Growth, Value, Stability, and Sentiment as well.
If you’re looking for other top-rated stocks in the Tobacco industry with an Overall POWR Rating of A or B, you can access them here.
Bottom Line
As a n established player in the tobacco space, MO is expected to thrive this year and beyond because it continues to evolve with changing market demand. Its stock fell because of the rumors over tougher regulations. However, the stock is expected to recover in the near term as prices of several consumer goods, including cigarettes, increase with an economic recovery. So, we believe investors should not miss the opportunity to buy shares of MO now.
MO shares were trading at $47.15 per share on Tuesday afternoon, down $0.07 (-0.15%). Year-to-date, MO has gained 16.99%, versus a 12.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.
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