We were neutral on Altria Group, Inc. (NYSE:MO) the last time we wrote about it for various reasons. In that article, we spelled them all out. We concluded, “In all this analysis, we have assumed a zero-feedback loop from price increases themselves.” That is extremely unlikely. Price increases will very certainly hasten the decreases.
We will experience a recession at some moment, and states will impose a new armada of excise taxes. This, too, will hasten reductions. When the smoking minority becomes very small, anticipate laws to combat smoking even more vehemently. All of this leads us to believe that Altria should be valued as a diminishing stream of dividends. This is not rocket science, as we warned you four years ago. Altria still has a negative total return from that period.
Instead of going long the stock directly, we advised our readers to sell $35-$37.50 cash secured puts. Let’s look at the most recent outcomes and see if we still advocate options for this stock instead of going direct long.
Altria Earnings
It was great that the earnings release included some accidental humor regarding inflation vigilantes, aka tobacco consumers.
Rising gas prices and inflation continue to strain cigarette users’ disposable income in the second quarter, decreasing volume across the board. To compensate for price increases, we believe tobacco customers changed their purchase behavior across a wide range of goods and services. Consumers’ spending management strategies included partially filling the gas tank and switching from multipack to single-pack tobacco sales, particularly among discount smokers. The major story for us, though, was the rate of reduction in consumption. Total industry volumes fell 7.5%, while Altria’s smokables division fell 9%.
The 9% drop came after an 8% drop in the previous quarter. We cannot overstate how awful these figures are. Altria (NYSE:MO) has only one card up its sleeve: recurrent and punitive price increases. That worked again in the quarter, and the corporation squeezed out an adjusted EPS gain. This was one of the smallest increases in adjusted EPS per share, completely due to a fall in the float. Altria’s problems were not limited to its smoking division; oral tobacco also had reduced margins and adjusted OCI.
This was unsurprising, given that even a pricing powerhouse like Altria was certain to experience inflationary pressures at some point. Oral tobacco, the industry’s saving grace, also witnessed volume declines. The company confirmed its EPS projection for 2022 of $4.79 to $4.93, which we believe was one of the finest news in the press release.
JUUL (JUUL)
The JUUL saga (see JUUL Of Denial) is nearing its climax. The corporation is in such bad shape that Altria has reduced its market worth to $450 million. That is $450 million too much, but Altria will eventually mark it to zero. Surprisingly, Altria (NYSE:MO) raised the possibility of being removed from its non-compete provision with JUUL. In layman’s terms, Altria’s investment in JUUL had performed so poorly that it now had the legal right to re-enter the e-cigarettes market that it had exited with a $200 million charge in 2018.
So, $200 million to shut down its e-cigarettes, a $12.8 billion loss on JUUL (which will eventually be reduced to $12.3 billion), and then Altria brought up the possibility of returning to the market. So why not? Fortunately for shareholders, Altria has opted not to pursue this path, at least for the time being.
Outlook & Verdict
Peaking energy costs are anticipated to relieve Altria, allowing it to continue its relentless price hikes. This is balanced with the real risk of a recession with genuine consequences, regardless of how the term is technically defined. States will likely impose another round of excise taxes on cigarettes in 2023, which might result in a 7-9% volume reduction.
Suppose Altria tries to maintain its profit, which would necessitate another 10% price increase. In that case, we may finally see the plunge into the abyss as volume declines accelerate. The pool of smokers continues to shrink due to life’s three certainties: death, excise taxes, and Altria price increases. This is not the Altria of old, and the last six years have seen negative price and total return results.
So, please, no “if you invested $1 in Altria (NYSE:MO) in 1822.” Aside from the fact that we’d need to carbon date you to determine your age, your past is unimportant now. This should be valued with a terminal value of $0 in 7-10 years, and investors should apply a discounted cash flow analysis to determine the appropriate price. It is currently $35-$37.50 for us, and this figure will only decrease with time. We traded this in our marketplace portfolio, selling the $35.00 Cash Secured Puts.
As is usual, such transactions provide a significant price buffer. They typically provide a higher “yield” than going long in the stock.
Featured Image: Megapixl © Tarheel1776
