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The Smartest Tobacco Stock to Buy for the Long Haul

Altria Group (MO) reported weak second-quarter revenues but reaffirmed its EPS guidance range for 2022. While the stock may remain under pressure in the near term due to the broader market volatility, the company’s strong profitability and reasonable valuation make it a solid long-term investment. Read on…

Altria Group, Inc. (MO) manufactures and sells smokable and oral tobacco products in the United States. The company provides cigarettes primarily under the Marlboro brand; cigars and pipe tobacco principally under the Black & Mild brand; and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands, as well as provides on! Oral nicotine pouches.

The stock has gained 1.9% over the past month. MO reaffirmed its full-year 2022 guidance for adjusted diluted EPS in the range of $4.79 to $4.93, representing 4% to 7% year-over-year growth.

"Our tobacco businesses performed well in a challenging macroeconomic environment for the first half of the year," said Billy Gifford, Altria’s Chief Executive Officer.

Here is what could influence MO’s performance:

Mixed Financials

MO’s net revenues came in at $6.54 billion for the second quarter ending June 30, 2022, down 5.7% year-over-year. Its operating companies income (OCI) increased 0.6% year-over-year to $2.8 billion. Its adjusted EPS increased 2.4% year-over-year to $1.26.

Impressive Shareholder Returns

The company repurchased 10.1 million shares in the second quarter for a total cost of $507 million. Also, it paid dividends worth $1.6 billion in the second quarter.

MO’s annualized dividend of $3.60 per share translates to an 8.18% yield. The company's dividends have grown at a CAGR of 8.1% over the past five years. Also, the company has increased its dividends for 18 consecutive years.

Strong Profitability

MO’s trailing-12-month net income margin of 14.30% is 163.2% higher than the industry average of 5.43%. In addition, its trailing-12-month gross profit margin of 66.57% is 104.6% higher than the 32.53% industry average. 

Also, its trailing-12-month ROE, ROC, and ROA are 3703.4%, 297.6%, and 56.9% higher than the respective industry averages.

Discounted Valuation

The company’s 9.12x forward P/E is 52.6% lower than its industry average of 19.24x. Also, its 8.20x EV/EBITDA is 31.8% lower than its industry average of 12.01x.

Impressive Growth Prospects

Street expects MO’s revenues to rise 0.5% in the next quarter and 1.4% next year. The company’s EPS is expected to increase 7.4% in the current quarter, 5% in the current year, and 5% next year.

In addition, MO’s EPS is expected to rise at a 5.1% CAGR over the next five years. Furthermore, the company has an impressive earnings surprise history; it topped the consensus EPS estimates in three of the trailing four quarters.

Consensus Rating and Price Target Indicate Potential Upside

Out of the 11 Wall Street analysts that rated MO, four rated it Buy, and six rated it hold. The 12-month median price target of $48.91 indicates an 11.2% potential upside. The price targets range from a low of $36.00 to a high of $59.00.

POWR Ratings Reflect Solid Prospects

MO has an overall C grade, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MO has an A grade for Quality. The company’s higher-than-industry profitability is consistent with its Quality grade.

Among the 10 stocks in the A-rated Tobacco industry, MO is ranked #6.

Beyond what I stated above, we have graded MO for Growth, Sentiment, Value, Stability, and Momentum. Get all MO ratings here.

Bottom Line

The current market volatility could keep MO under pressure in the near term. However, the company’s exceptional shareholder returns and growth prospects make it a solid long-term investment at its current discounted valuation.

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

MO has an overall POWR Rating of C, which equates to Neutral. Check out these other stocks within the Tobacco industry with B (Buy) ratings: Japan Tobacco Inc. (JAPAY), Imperial Brands PLC (IMBBY), and Vector Group Ltd. (VGR).

MO shares were trading at $43.97 per share on Friday afternoon, down $0.03 (-0.07%). Year-to-date, MO has declined -3.78%, versus a -12.61% rise in the benchmark S&P 500 index during the same period.

About the Author: Spandan Khandelwal

Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.


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