Preceding the presentation of the company’s business fundamentals and the regulatory environment and their discussion at the Barclays Global Consumer Staples Conference Sept. 6 in Boston, Altria Group Inc. (MO, Financial) updated its shareholders with its guidance on EPS – adjusted to one-time charges and on a diluted basis – for full fiscal 2017.
In the news release published on its website, the U.S. tobacco giant left EPS for full fiscal 2017 unchanged at $3.26 to $3.32.
Altria Group expects that the financial effects from certain smokeless tobacco products’ recall in the first quarter of fiscal 2017 and “the benefit of reporting four full quarters of equity income from Anheuser-Busch InBev SA/NV (BUD, Financial) in 2017 versus three quarters in 2016 from SABMiller PLC (SBMRF, Financial)” will be some of the drivers for expecting a higher growth in EPS – adjusted to one-time charges – in the second half of fiscal 2017 compared to the same period of fiscal 2016.
EPS as expected by Altria Group for full fiscal 2017 represents a 7.5% to 9.5% increase from the EPS – adjusted to one-time charges – of $3.03 reported by the tobacco giant at the end of full fiscal 2016 and a 2.5% increase – on average – from the analysts’ estimates range on full fiscal 2017 EPS.
As shown in the chart below, analysts estimate that Altria Group will close fiscal 2017 reporting an adjusted EPS ranging between a low of $3.11 and a high of $3.3. The average analyst estimates an adjusted EPS of $3.26, a 7.6% increase from one year ago.
Source: Yahoo Finance
Analysts back earnings for full fiscal 2017 on revenue of $19.74 billion. This is an average calculated on 14 estimates of analysts who were surveyed.
Source: Yahoo Finance
Revenue as forecasted by analysts for full fiscal 2017 range between a low of $19.5 billion and a high of $19.93 billion.
Analysts foresee a 9.20% growth in Altria Group’s adjusted earnings from fiscal 2017 to fiscal 2018 and a 7.95% average annual growth in the U.S. tobacco giant’s bottom line over the next five years.
Valuation
There are different methods that can be used to evaluate the tobacco stock. None can exclude a thorough research on Altria Group that should be done by analyzing the financial statements of at least the last five years, the business and the industry in which Altria Group operates to have a better picture of the company’s outlook and fundamentals. The latter as of the most recent quarter are lying on approximately $2.26 billion in cash on hand and securities and are capable of generating more than $7 billion every year for business growing purposes and dividend payments.
One of these methods employs the dividend discounted model (DDM). This way to assess the intrinsic value of Altria Group is one of the best since the company is a loyal dividend payer. The DDM requires the employment of certain variables that can be chosen as follows:
- As a constant growth rate to be employed in the model to calculate next year’s dividend and in the formula to calculate the tobacco company’s terminal value, the analysts’ estimates on Altria Group next year and the next five years’ (per annum) earnings growth rates can be used.
- As a rate to discount back to the present value predicted annual dividends and to be employed in the formula to calculate the company’s terminal value, either Altria Group’s cost of equity capital or the tobacco industry’s average cost of equity capital can be used. On this website you can find estimates on cost of equity capital for each industry and since Altria Group’s portfolio includes interests in the winery industry, I would calculate the tobacco company’s cost of capital equity as a weighted average between estimates on the two industries of tobacco and food and beverage.
Another method to quickly assess Altria Group’s value is multiplying the forward price-earnings (P/E) ratio of 17.77 – as forecasted by analysts – by an EPS of $3.41, which is an average between an EPS of $3.26 forecasted for full fiscal 2017 and an EPS of $3.56 for full fiscal 2018. The combined ratio yields to a value of $60.60 per share.
Also, the average price of $72.85 at which Altria Group bought back 14.4 million of its own ordinary shares in the second quarter of this fiscal for a total consideration of about $1.05 billion, can be considered as an indication for Altria Group’s value.
In addition, as a benchmark to have an idea about how much Altria Group can be worth today, you can consider the analysts’ average target price of $71.69 per share. This is a mean of 13 estimates of analysts who were surveyed. The estimates on the tobacco giant’s target price range between a low of $62 per share and a high of $80 per share.
Each of the methods suggested in this article might yield very different values of what can be considered as an approximation of Altria Group’s intrinsic value that compared with its market value will direct the investor’s next decision on the U.S. tobacco giant, but it should be known to readers that Altria Group is for income investors. Therefore, even if the tobacco stock is trading above the computed intrinsic value, buying shares of Altria Group is a wise decision for those investors who are seeking to benefit from a secure stream of payments in the form of dividend. And Altria Group as well as any other tobacco giant nowadays offers this kind of benefit because tobacco is still a steadily growing industry even though a lot of people wrongly believe the contrary. If you take the time to go through my previous articles on Altria Group and other tobacco giants, you will read the reasons why investors should keep a portion of their portfolios still invested in the tobacco industry.
Altria Group is trading at $62.73 per share, with a market capitalization of $120.35 billion, a price-book (P/B) ratio of 9.70, a P/E ratio of 8.29 and a price-sales (P/S) ratio of 6.22. The U.S. tobacco giant is trading only few dollars above its 52-week low of $60.01. The 52-week high is $77.79.
Disclosure: I have no position in Altria Group.
