Altria Group, Inc. (NYSE: MO) has always been one of the most important holdings in our portfolio. Whether it’s No. 1 or No. 3 depends on how individual stocks perform, but it’s fair to say it’s been a top 3 that has held for a very long time. Given this, it’s obvious that we notice Altria’s performance when we look at the overall portfolio, although we don’t feel the need to monitor this position too often given the reason (dividends) we hold this title.
Prior to performing this exercise, we had a hunch that Altria should have outperformed the market over the past few months, and it certainly has. Although the percentage varies, Altria’s outperformance against the S&P 500 Index (SPY) indicates whether you are looking at the 1M, 6M, 1 Y or YTD charts. Altria also outperformed fellow tobacco stocks Philip Morris (PM) and British American Tobacco (BTI) in most of these periods. Only in the 6 month timeframe is Altria slightly behind both of these names, and this is attributed to the fact that Altria hit its 52 week high of $57.05 exactly 6 months ago .
Now, this is all retrospective. What about the future? Nobody has a crystal ball, but below we offer the analysis of why the recent outperformance is likely to continue at least until the end of the year.
In a market looking for excuses to sell, a strong US dollar causing headwinds for equities with international exposure is next on the list, as Seeking Alpha has covered here. In the short to medium term, this should make things more difficult for stocks with international exposure, meaning stocks like Altria with 100% domestic exposure should perform better in terms of earnings (actual and estimated). Add that to the fact that domestic stocks trade at a discount to international stocks, as the excerpt from the article linked above shows:
“The Mid (Domestic) stock trades at a 12% P/E discount to the Mid (International) stock (against a long-term average of 5%) and offers 2023 EPS and growth. slightly faster sales.”
The flip side has always been that a weaker dollar benefits companies with international exposure, and Altria lacks that.
Tax loss harvest
Tax-loss harvesting is notorious for impacting the price of certain stocks towards the end of the year. This becomes even more relevant in a massive year like this, and losers can be expected to sell even more to maximize write-offs.
With a YTD performance of -5%, Altria will be at the very bottom of this list. Not only will the stock not face this selling pressure, but it may also benefit from the reallocation of freed up funds to safer and cheaper names.
Good riddance, JUUL
JUUL was nothing short of a nightmare for Altria investors from the start. Altria cushioned the blow by almost continuously writing off the value of JUUL from its books each quarter, but the damage overall was significant. So what’s good now?
- JUUL’s current valuation on Altria’s books is just $450 million, a tiny amount for an $81 billion company.
- Altria has terminated its non-competition agreement with JUUL. This could mean that the company is either looking for a better e-cigarette brand or working on its own to master this market. As Altria’s long-term investors, we hope the company takes its time to figure out what’s next in this space, instead of wasting another $10 billion on a rushed effort. Or Altria might consider recovering its JUUL losses in a different way, as shown below.
- JUUL is preparing to file Chapter 11. Altria will likely be the first in the event that JUUL’s intellectual property and valuable assets are put up for sale. With its larger network and deeper pockets, Altria might just be able to handle things better than JUUL was. But that’s a long shot at this point since the big shadow of the FDA still lurks when it comes to vaping.
Not only are MO shares yielding twice the yield of 10-year Treasuries despite rising rates, but the company is also one of the best bets in an inflationary environment. The beauty of selling an addictive consumer product in billion units is that even in a declining business volume in an inflationary environment, the company can and does profitably pass on a few cents of price increases. Consumers usually don’t even feel the pinch and even if they do, they’re unlikely to give up their habits en masse.
Altria’s impressive start to 2022 has gone downhill since hitting $57 in April. But the stock’s recent relative outperformance shows that investors currently value safety over growth and risky assets. We expect this trend to continue for at least the next two quarters until clarity emerges on inflation control and Fed policies. That’s not to say that Altria, or any stock for that matter, is a buy at any price. Our sweet spot to buy Altria is between a multiple of 9 and 12. Using the current forward EPS estimate of $4.84, this would be between $43.56 and $58.08.
Good luck out there and stay safe.