Moving MO from Buy to Sell
We are moving shares of Altria (MO) from Buy to Sell. While the shares remain 21% below our $66 price target, the risk/return trade-off has become unfavorable.
The primary increase in risk comes from Philip Morris International’s likely acquisition of Swedish Match. PMI has made an all-cash offer and we believe a definitive deal is likely, as the Swedish Match board has agreed to the transaction. With the combination, Philip Morris would re-enter the United States market and pose a new and more aggressive competitive threat to Altria in the critical smokeless tobacco products segment.
Philip Morris was spun off from Altria in 2008 and sells Marlboro and a range of other tobacco products globally with the exception of the United States, whereas Altria has the U.S. market for these products. Philip Morris would gain access to Swedish Match’s U.S. smokeless and non-tobacco products, including oral nicotine pouches where it would have a powerful 64% market share compared to Altria’s 18%. Further, PMI could drive its vaping and other non-smokable tobacco products through the newly acquired manufacturing and distribution channels in a direct threat to Altria’s market share.
This adds to our concerns about Altria’s future, where tobacco industry unit volumes have resumed their 5%+ decline, where consumers are reining in spending due to inflation (hindering Altria’s ability to continue to raise prices) and a slowing economy, and from the potential risk from a government ban on menthol cigarettes which generate an estimated 20% of Altria’s profits.
Altria has little financial room for profit weakness. It currently pays out close to 90% of its free cash flow as dividends – any further threat to the dividend (especially as its 7% yield is helping support its share price) would lead to share price pressure. Similarly, the business value has downside if the otherwise stable earnings and cash flow start to weaken.
The MO recommendation generated an approximate 32% total return since our initial recommendation at 43.80 in our March 2021 edition of the Cabot Turnaround Letter.