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Altria’s Erratic Price to Earnings (P/E) Ratio

Marlboro cigarettes. Source: Flickr Image

Altria Group or Altria (NYSE:MO) is not just a great company but a profitable one.

Altria’s profit margins are the envy of most companies.

For example, on a consolidated basis, its gross margins have been north of 60%.

What’s even more amazing is that its operating margins soared beyond 50% in 2020.

And, this was achieved amid a severe pandemic outbreak.

While Altria has done a good job running the business, its stock price has told a different story.

Between 2017 and 2021, Altria’s market capitalization has plunged by about 40%.

Altria was a $150 billion company back in 2017.

However, its recent valuation was only $90 billion based on the April 2021 average close price.

Is Altria worth this low?

Let’s take a look.

In this article, we are going to look at Altria’s market valuation from a historical perspective.

That said, we will compare its current valuation with the historical values using several ratios, including the price to sales ratio, price to book ratio, price to gross profit ratio, price to operating income ratio, price to earnings ratio and price to free cash flow ratio.

Let’s get started.

Altria’s Market Capitalization

Altria market capitalization

Altria market capitalization

* Market cap data came from the author’s own calculation using Altria’s weekly close price adjusted for splits and number of shares outstanding extracted from the company’s financial reports.
* Weekly close price adjusted for splits came from Yahoo Finance.

Let’s first look at Altria’s market capitalization for the period from 2017 to 2021.

In the last 5 years, Altria’s market cap has plunged from around $150 billion in mid of 2017 to about $90 billion as of April 2021.

The 40% decline in Altria’s market cap was partly attributed to the shares buyback that the company has been doing.

Over the past 4 years, Altria has managed to reduce its share outstanding by about 4% from 1.93 billion to 1.86 billion as of 1Q 2021.

For your information, Altria has stopped buying back shares since 2020 when the COVID-19 outbreak started.

While the shares buyback has partly contributed to the shrink in Altria’s market cap, the decline has been mostly driven by the falling stock prices.

Altria’s stock was valued at around $70 per share back in May 2017.

However, this figure has fallen by more than 30% in the last 5 years and was traded at only $48 per share as of April 2021.

Altria’s Price to Sales Ratio

Altria price to sales ratio

Altria price to sales ratio

* Price to sales data came from the author’s own calculation using Altria’s market cap computed earlier and TTM revenue net of excise taxes.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

In terms of price to sales ratio, Altria was valued at more than 6X its trailing 12-month (TTM) revenue net of excise taxes back in 2018.

However, that figure has declined to only 4X as of April 2021.

In 2020, Altria’s valuation with respect to TTM sales reached only 3X, representing nearly a 50% decline from its peak valuation reported in 2018.

As of April 2021, Altria’s market valuation with respect to revenue was still considerably low compared to its historical average.

However, Altria had significantly higher sales as of 2020 compared to 2018.

In fact, Altria’s revenue grew the most in 2020, beating all prior records.

It doesn’t make sense that Altria was still traded at only 4X its TTM sales when it reported the best sales result.

Over the chart, you may notice that there has been a significant uptick in Altria’s price to sales ratio in 1Q 2021.

The uptrend may indicate that Altria’s stock price has broken out of its long slump and have more upsides going forward.

If this is the case, there will be significant opportunities for investors to invest in Altria’s stock now considering that it was still traded at such a low valuation.

Altria’s Price to Book Ratio

Altria price to book ratio

Altria price to book ratio

* Price to book data came from the author’s own calculation using Altria’s market cap computed earlier and total stock equity extracted from the company’s balance sheets.

The trend of Altria’s price to book ratio looks completely opposite to the price to sales ratio plot.

Between 2017 and 2021, Altria’s price to book or equity ratio has been on a rise and reached a record high at more than 30X.

At this ratio, Altria’s stock valuation was more than 30 times its book value or net worth.

The reason for the increasing ratio has been largely due to the shrinking equity values for Altria.

As of the 4th quarter of 2020, Altria’s equity value or net worth was valued at only slightly below $3 billion.

Altria used to have an equity or book value of $12 billion back in 2017.

Over the years, Altria’s outsized cash dividends and shares buyback has shrunk the equity or net worth of the company.

Altria’s shrinking equity has been further worsened by the drop in profitability in 2020 when the company suffered record losses driven by huge write-offs due to its investment loss in JUUL and Cronos.

Altria’s Price to Gross Profit Ratio

Altria price to gross profit ratio

Altria price to gross profit ratio

* Price to gross profit data came from the author’s own calculation using Altria’s market cap computed earlier and TTM gross profits.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

Altria’s market valuation with respect to the company’s TTM gross profit has also decreased over the years and reached only 7X as of April 2021.

Altria’s stock was traded at a price to gross profit ratio of more than 10X in 2018.

However, this ratio has slumped considerably to only 6.0 during 2020, which was the lowest valuation with respect to gross profit.

Similar to the price to revenue ratio, Altria’s price to gross profit ratio recovered considerably in 1Q 2021, indicating that the company’s stock may have broken out of its slump and have significant upsides going forward.

Although the price to gross income valuation multiple had recovered significantly as of 1Q 2021, it was still way below its historical peak.

For your information, Altria had much higher gross profits in 2020 compared to 2018.

Still, Altria’s valuation multiple was relatively low as of 1Q 2021 compared to that of 2018.

As such, there is a big possibility that Altria’s valuation multiple will significantly expand in the near future when investors realize that Altria has been able to operate efficiently even during a severe pandemic outbreak.

Altria’s Price to Operating Income Ratio

Altria price to operating income ratio

Altria price to operating income ratio

* Price to operating income data came from the author’s own calculation using Altria’s market cap computed earlier and TTM operating incomes.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

Altria’s price to operating income ratio is having a similar trend as the price to gross profit ratio.

That said, Altria’s price to operating income ratio has slumped to its lowest level at only 7X during 2020.

The ratio has recovered slightly to more than 8X as of 1Q 2021.

Altria used to have a price to operating income ratio that averaged around 11.0X in 2018.

Again, Altria had much higher operating profits in 2020 compared to 2018, and the recent valuation multiple has not reflected the company’s operating strength yet.

Therefore, there will be significant upside to Altria’s stock at the current price point of around $48 per share when the valuation multiple expands.

Altria’s Price to Earnings Ratio

Altria price to earnings ratio

Altria price to earnings ratio

* Price to earnings data came from the author’s own calculation using Altria’s market cap computed earlier and TTM net earnings attributable to the company.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

Altria’s price to earnings ratio or PE ratio is vastly different from what we have seen so far.

According to the chart, Altria’s PE ratio averaged around 20X in 1Q 2021.

Prior to that, Altria’s price to earnings ratio hovered at more than 100X, due mainly to its plummeting net earnings and net earnings which have dived to the negative levels in 2020.

As seen, Altria’s valuation was priced at negative figures when its earnings reached the negative territory.

Again, Altria’s PE ratio had been erratically inconsistent between 2019 and 2020, illustrating the devastating effect of the JUUL and Cronos investment loss on the company’s earnings.

Altria may have operated its core businesses efficiently, it had not been the case when it comes to investments and acquisitions.

However, we have seen that Altria’s net earnings have significantly recovered based on the 2020 4th quarter result.

Altria’s net earnings have slowly recovered and the huge write-offs as a result of its investment loss have already been behind the company.

Therefore, if Altria’s success amid the pandemic persisted, there will be a significant valuation multiple expansion in the near future.

Altria’s Price to Free Cash Flow Ratio

Altria price to free cash flow ratio

Altria price to free cash flow ratio

* Price to free cash flow data came from the author’s own calculation using Altria’s market cap computed earlier and TTM free cash flow.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

Similarly, Altria had an equally strong free cash flow generation in 2020 compared to all prior years.

However, Altria carried a low valuation multiple with respect to free cash flow as of 1Q 2021.

As seen from the chart, Altria’s price to free cash flow ratio was only slightly above 10X as of 1Q 2021.

Historically, Altria reported a price to free cash flow ratio as high as 25X in 2018.

Therefore, Altria’s stock valuation in 1Q 2021 was less than half the valuation reported in 2018 based on the same amount of free cash flow.

Even as other businesses suffered amid the pandemic, Altria continued to thrive and generate strong free cash flow.

Altria’s valuation multiple with respect to free cash flow will certainly expand in the near future when investors realize that the company has thrived under the COVID-19 outbreak and continued to generate strong free cash flow.

Conclusion

Altria’s stock valuation was relatively low from the perspective of a few metrics, including the price to sales ratio, price to gross profit ratio, price to operating income ratio and price to free cash flow ratio.

All of these ratios measure Altria’s operating strength, and Altria’s operating strength has actually been getting better as shown in the higher revenue, gross profit and operating income reported in 2020 compared to the figures reported 2 years ago.

However, Altria’s valuation multiple with respect to these ratios continued to remain low as of 1Q 2021, indicating that investors’ sentiments have yet to catch up to the company’s excellent results reported in 2020.

While there are significant risks associated with buying Altria’s stock, including the slowing cigarette shipment volumes, potential litigations and antitrust, I believe the current market valuation has already priced in these risks.

Additionally, these valuation ratios have remained low for quite a long time, indicating that Altria’s stock valuation may have already bottomed out.

Therefore, there will be significant upsides to Altria’s stock should these valuation multiples tick higher in the future.

References and Credits

1. All financial data in this article were obtained and referenced from Altria’s annual and quarterly financial statements which can be found in Altria’s Earnings Releases and Presentations.

2. Featured images in this article are used under creative commons licenses and sourced from the following websites: SoQ and South Bend Voice.

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