Royal Bank of Canada Downgrades Altria Group

Company sets a new target price of $62 per share

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The Royal Bank of Canada (RY, Financial) released new ratings for Altria Group Inc. (MO, Financial) with a new target price Thursday.

Altria Group has been downgraded by analysts at Royal Bank of Canada to Underperform from Sector Perform with a target price per share of $62.

Royal Bank of Canada’s downgrade is the third over a total of seven ratings delivered by analysts over the last 12 months and preceded by Berenberg’s (from Buy to Hold) downgrade, released on March 3. During this period, Jefferies (to hold) and Citigroup (to buy) initiated a coverage on the U.S. tobacco giant. The company was also downgraded by BofA/Merrill (from Buy to Neutral) last year on March 24. Altria got the most recent upgrade by BofA/Merrill (from Neutral to Buy) Jan. 4.

The new target price represents a 14.8% downside from the average target price of $72.80 per share, which now ranges between a low price of $62.00 and a high price of $80.00 per share. Altria Group is trading at $74.45 per share. The firm sees a 16.6% decrease in the market value of the tobacco giant because “shares are trading nearly in line with Reynolds American (RAI, Financial) on P/E and EV/EBITDA, despite Reynolds' pending acquisition by British American Tobacco (BTI, Financial),” Nik Modi, analyst at Royal Bank of Canada, said.

The recommendation rating for Altria Group is 2.2, and it ranges between 1.0 (Strong Buy) and 5.0 (Sell). Seven analysts out of a total of 12 recommend holding shares of Altria Group.

The U.S. tobacco giant is uptrending and gained nearly 10% year to date. The price-book (P/B) ratio is 11.29, the price-sales (P/S) ratio is 7.45, the P/E ratio is 10.21, and the forward price-earnings (P/E) ratio is 20.81. The 52-week range is between $59.48 and $76.55.

Reynolds American is trading at $62.23 per share which is close to its 52-week high of $62.28, is uptrending and gained 11% year to date. The Altria peer has a P/B ratio of 4.09, a P/S ratio of 7.10 and a forward P/E ratio of 22.38.

Reynolds American’s P/E ratio is 14.64.

When Altria Group is compared to Reynolds American in terms of the dividend yield, we can see that the first tobacco producer is actually selling one dollar of dividend at a higher price than one dollar of Reynolds American’s dividend.

Altria Group distributes an annual dividend of $2.44 (for a yield of 3.21%) versus an annual dividend of $2.04 (for a yield of 3.37%) distributed by Reynolds American; both are paid quarterly to their shareholders.

Establishing which one is the cheapest on the stock market today is not easy, but you can use a valuation method outlined in this article to assess the intrinsic value of both tobacco producers to see whether they are overvalued by the stock market and judge which one represents the best buying opportunity in the tobacco stock industry.

Disclosure: I have no positions in any stock mentioned in this article.

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