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Elevator Pitch
My investment rating for Altria Group, Inc.’s (NYSE:MO) shares is a Sell.
I evaluated how Altria Group performed in the second quarter of 2022 with my earlier August 4, 2022 article for MO. I turn my attention to Altria Group’s upcoming Q3 2022 earnings in this update.
I don’t see MO delivering an earnings beat for Q3 2022, and I am also worried about the risk of Altria Group lowering its bottom line guidance for the full year. More significantly, I am of the opinion that regulatory issues and competition will hurt MO’s growth outlook in the long term. Therefore, I maintain my Sell rating for Altria Group.
How Were Altria’s Previous Earnings?
MO didn’t impress the market with its previous second-quarter earnings.
Altria Group’s YoY earnings per share or EPS growth moderated from +10.1% for Q4 2021 and +4.7% for Q1 2022 to +2.4% for Q2 2022. More importantly, MO only achieved a marginal +0.8% EPS beat in the most recent quarter.
In my prior article for MO written in August, I also stressed that “the quality of the earnings beat for Altria was low, as it wasn’t supported by higher revenue and volume.”
Is Altria Expected To Beat Earnings?
MO will be reporting the company’s Q3 2022 financial results in the later part of this week, or more specifically this Thursday, October 27, 2022 before trading hours.
I don’t expect Altria to deliver a third-quarter earnings beat for a couple of reasons.
Firstly, Wall Street analysts haven’t been too aggressive in reducing their respective third-quarter bottom line projections for MO. The sell-side’s consensus Q3 2022 normalized EPS forecast for Altria Group was lowered by -1.2% and -1.1% in the past six months and three months, respectively. In fact, the market’s current consensus Q3 bottom line forecast for MO is $1.30, which is equivalent to a YoY growth of +7% and a QoQ increase of +3%. In a nutshell, I am of the view that the sell-side analysts are a tad too optimistic about Altria Group’s Q3 2022 financial performance.
Secondly, industry data suggests that cigarette sales are holding up well, but there is nothing indicating that the tobacco industry has performed above expectations in recent times. According to a September 21, 2022 CSP Daily News article which cited research from Goldman Sachs (GS), “all channel dollar sales for total nicotine during the most recent two-week period (as of late-September 2022) were up 0.2% year-over-year.”
Thirdly, a key factor influencing Altria Group’s actual Q3 2022 EPS is share buybacks. If MO allocates a greater proportion of its capital to share repurchases, this will reduce the share count for Altria Group to a larger-than-expected extent and translate into higher-than-expected earnings for the company. In the last three months, Altria Group’s share price actually rose by +5.1%, which suggests there is less motivation for the company to accelerate its share buybacks using the underperformance of its stock as a justification. In my view, MO’s actual monies spent on share repurchases for the third quarter might turn out to be less than expected, which implies a lower degree of earnings accretion from buybacks.
In conclusion, I think that Altria Group will achieve in-line EPS for Q3 2022, rather than an earnings beat.
MO Stock Key Metrics
The key metrics that investors should watch for with MO’s stock relates to the company’s full-year fiscal 2022 guidance.
When Altria Group announced its Q2 2022 earnings in late-July, the company maintained its FY 2022 non-GAAP adjusted EPS guidance of $4.79-$4.93. Based on the mid-point of MO’s guidance, the company’s management sees Altria Group’s normalized EPS expanding by +5.4% YoY to $4.86 for the current year.
My view is that there is a chance that MO might lower the company’s FY 2022 bottom line guidance in tandem with its Q3 2022 earnings release this week. Considering the weak economic environment and the cutback on discretionary consumer spending, it is likely that Altria Group chooses to lower its full-year EPS guidance.
It is worth noting that the sell-side analysts aren’t that certain when it comes to forecasting Altria Group’s full-year FY 2022 results as well. In the past three months, seven Wall Street analysts raised Altria Group’s fiscal 2022 EPS projection, but another six of them cut MO’s current-year bottom line estimate. This uncertainty increases the possibility of a cut in FY 2022 guidance.
What Is Altria’s Long-Term Prediction?
In predicting how Altria Group will perform in the long run, one has to consider two key long-term risk factors.
I mentioned in my prior article for MO that “Philip Morris International (PM) “is expected to enter the US market with its IQOS-branded products after April 2024”, after “the current distribution agreement between PM and MO expires.” I stressed in the earlier write-up that “Altria’s future sales in the US might be negatively affected” as a result of competition. My point of view is validated by Altria Group’s recent October 19, 2022 announcement that “U.S. commercialization rights to the IQOS system will transition to” PM on April 30, 2024 after MO signed an “agreement with Philip Morris International for IQOS transition.”
Another significant long-term risk factor for Altria Group is uncertainty with respect to the tobacco industry’s future regulatory direction. On October 6, 2022, Seeking Alpha News reported that the FDA or U.S. Food and Drug Administration made a comment about being “deeply concerned” regarding data highlighting “more than 2.5M school students in the country use e-cigarettes.” Separately, an October 15, 2022 Associated Press article noted that there will be a “statewide ballot” in early-November “California ban on flavored tobacco.” These news articles suggest that Altria Group and its peers will face substantial regulatory pressures in launching and selling new products going forward.
Is Altria Stock Now Fairly Valued?
On the surface, Altria Group’s stock appears to be fairly valued or even undervalued looking at headline valuation metrics.
MO is now valued by the market at 9.0 times consensus forward next twelve months’ normalized P/E as per S&P Capital IQ data, and this is about -9% below its three-year mean forward P/E of 9.9 times.
However, competition and regulatory factors are expected to have a negative impact on Altria Group’s long-term outlook, as I discussed in the preceding section. As such, MO does deserve a valuation de-rating, and I view Altria Group’s shares as slightly overvalued.
Is MO Stock A Buy, Sell, or Hold?
I rate MO stock as a Sell. In the near term, Altria Group might potentially revise its FY 2022 guidance downwards when it reports Q3 earnings this week. In the long term, there is downside to MO’s future earnings after considering regulatory headwinds and competitive risks.
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