Finance 101 final presentation on Altria Group

1. Altria
Group,
Inc.
–
Update
Group 5: Michelle Darmawan
Zhang Chenxi
Manasvi Garg
Archit Ajit Sharma
Ho Qian Ying Adeline

2. Disclaimer
This study is purely for academic purposes. All
investments are subject to market risk. Please
read the report carefully before investing. The
group shall not be held responsible for any loss
made by following the recommendations made in
the following sections.

3. ALTRIA – The Company
• Introduction
• Industry Overview
• SWOT Analysis
• Financial Ratios
• Long Term Financing Structure
• Stock Analysis
• RECOMMENDATIONS

4. Subsidiaries
1. Phillip Morris USA Inc.
2. U.S. Smokeless Tobacco Company
3. Ste. Michelle Wine Estates Ltd
4. John Middleton Co.
5. Phillip Morris Capital Corporation

5. Business Segment Overview
1. Cigarettes
2. Cigars
3. Smokeless Products
4. Wine Products
5. Phillip Morris
Capital Corporation

6. Net Revenue Breakdown by Business
Segment
2% 4%
3%
Cigarettes
6%
Cigars
Smokeless Products
Wine Products
85%
Phillip Morris Capital
Corporation

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8. 2. High Tax Rate

9. 3. Highly susceptible to litigation
• Insurance program reauthorization act of 2009 drastically increased
taxes on tobacco products to provide funding for governmentsponsored health insurance for illegal aliens and low-income families
4. New opportunities for growth
e.g. smokeless products and wine

10. Major Players & Competitors
1. Reynolds American, Inc. (RAI)
2. British American Tobacco PLC. (BTI)

11. 3. Phillip Morris International (PM)

12. SWOT Analysis
STRENGTHS
WEAKNESS
1. Largest Tobacco Manufacturer
2. Company is well established
3. Company stock is generally not
volatile, with a beta ratio of only
0.43
1. Declining smoking rates
2. Cigarettes are the only driving
force in company
3. High competition
OPPORTUNITIES
THREATS
1. Acquisitions can be extremely
profitable
2. Smokeless products proved to be
growing trend in consumers.
1. Illegal brands can compromise
market share
2. High taxes can threaten growth
3. Social pressures discourages
smoking.

13. FINANCIAL STATEMENT ANALYSIS

14. Profitability
35%
30%
25%
20%
Altria
Reynold
15%
Lorillard
10%
5%
0%
2008
2009
2010
2011
NET PROFIT
MARGIN
2012

15. Dividends
12%
10%
8%
Altria
6%
Reynold
4%
Lorillard
2%
DIVIDEND PAYOUT RATIO
120%
0%
2008 2009 2010
2011
2012
100%
80%
DIVIDEND YIELD
Industry average: 3.4%
Altria
60%
Reynold
40%
Lorillard
20%
0%
2008 2009 2010 2011 2012

16. Return on Assets & Equity
50.00%
40.00%
30.00%
Altria
20.00%
Reynold
Lorillard
10.00%
RETURN ON EQUITY
0.00%
2008 2009 2010 2011 2012
RETURN ON ASSETS
300.00%
250.00%
200.00%
Altria
150.00%
Reynold
100.00%
Lorillard
50.00%
0.00%
2008 2009 2010 2011 2012

17. Liquidity
2.5
2
1.5
Altria
Reynold
1
Lorillard
0.5
0
2008
2009
2010
2011
CURRENT RATIO
2012

18. Efficiency of Cash Conversion
300.0
250.0
CCC
200.0
Days Sales
Oustanding
Avg days in
Inventory
Days payables
Outstanding
150.0
100.0
50.0
0.0
2008
2009
2010
2011
2012
Components of Altria Cash Conversion Cycle

19. Efficiency of Cash Conversion
300.000
250.000
200.000
Altria
150.000
Reynold
Lorillard
100.000
50.000
0.000
2008
2009
2010
2011
2012
Comparisons of Cash Conversion Cycle

20. Solvency
10
8
6
4
2
Altria
0
Reynold
-2
2008
2009
2010
2011
2012
-4
-6
-8
-10
Comparison of Debt-to-equity
Ratio
Lorillard

21. LONG-TERM FINANCING

22. Capital Structure
Long-term
Total Debt to Total Debt to
Debt to
Equity
Assets
Equity
12,419 / 3,168 = 32,161 / 3,168 = 32,161 / 35,329
3.9201
10.1518
= 0.9103
Debt > Equity

23. Cost of Capital
g = 2%
D1 =1.880
Cost of
Equity =
7.98%
P0 = 31.44
Cost of
Debt =
6.7%

24. Cost of Capital Cost of Capital (WACC)
Weighted Average
wdrd(1-T) + wprp + wsrs
(0.9103)(0.067)(1-0.296) + (0.0897)(0.0798)
= 0.04293 + 0.00715806
= 5.009%
Low WACC
Good
investment

25. STOCK ANALYSIS

26. Stock Price Analysis
Stock Price Movements of Altria from May ‘11 to
March ‘13

27. Investment Risks
• Premium Brand Sale Decline
• Adverse Litigation and Legal Issues
• Decrease in Consumer Demand
▫ Public awareness of health risks associated with
smoking
▫ Social acceptability of smoking
• Government Regulation
▫ Cigarette taxes
▫ Restriction on Smoking

28. Quantifying Risk
• Capital Asset Pricing Model (CAPM):
▫ Risk free rate: Rf = 2.04 (10yr US Treasury Bond Yield)
▫ Cost of Equity/Return: Rs = 1.880/31.44 + 0.02 = 7.98%
β: 7.98=2.04+β (RM-RF) where Rf =2.04 and Rm = 16.40
β =0.41

29. Stock Valuation
DIVIDEND
GROWTH
MODEL
PRICING
MULTIPLES
OF OTHER
FIRMS
Absolute Valuation Model
Relative Valuation Model
“True" value of a firm
based on the dividends
P/E ratio focuses on
earnings of the company,
which drives investments
value

30. Dividend Growth Model
Terminal growth rate = 2%
Steady State – Year 6 onwards
$35.85: Undervalued by 14.03% taking $31.44 as current stock price

31. Multiples of Other Firms
• Lorillard
Altria EPS x Lorillard PER
2.21 x 13.84
$30.59
• Reynolds American
Altria EPS x RAI PER
2.21x 18.50
$40.89
Average Stock Price: $ 35.74

32. VERDICT
• UNDERPRICED
ALTRIA STOCK

33. Sensitivity Analysis
• Stock price vs. Terminal growth rate (g) and COE (rs)
Terminal
Growth
rate
(g)
7.68%
Cost
of
Equity
(rs)
7.78%
7.88%
7.98%
1.25%
29.24
28.79
28.36
27.93
27.53
27.13
1.50%
30.42
29.94
29.47
29.01
28.57
28.14
1.75%
31.70
31.18
30.67
30.18
29.70
29.24
2.00%
33.10
32.53
31.97
31.44
30.92
30.42
2.25%
34.62
34.00
33.39
32.81
32.25
31.70
2.50%
36.29
35.61
34.94
34.31
33.69
33.10
8.08%
8.18%

34. Results
• Stock price of the Altria group is very sensitive
to changes
• Terminal growth rate of 2% roughly matches the
forecasted growth of the US economy
– Altria stock price should remain stable

35. RECOMMENDATIONS

36. RECOMMENDATIONS
Consistently strong performer
Undervalued according to both
methods
Commanding industry position
Regular dividend payouts
Unlikelihood that any new tobacco
rivals will emerge
No. 1 in the sales in the US tobacco
market
BUY for the Altria Group, Inc.’s stock in
the short term.

37. RECOMMENDATIONS
Uncertainty surrounding the tobacco
industry
Low terminal growth rate of 2%
Highly sensitive to the terminal growth
rate
Cigarette sales constitute a massive 85%
share of Altria’s sales revenue
Growing inclination of consumers towards
smoke-free cigarette substitutes and
smokeless products
HOLD in the long term