Welke aandelen ga jij kopen in 2009?

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Altria Group Inc. MO

Analyst Note 09-08-2008

Following the official announcement this morning from Altria MO that it has reached an agreement with UST UST to acquire the smokeless tobacco giant, we are placing shares of both companies under review while we evaluate the implications of this announcement on shareholders of both firms. Altria has offered $10.4 billion in cash for the equity of the smokeless tobacco company, or $69.50 per share, a 29% premium to the stock's three-month trading price, and a 22% premium to our fair value estimate. We think that this is a good deal for UST shareholders, and we intend to raise our fair value estimate of UST. The amount of the increase will depend on our assessment of the legal and regulatory risks involved in the transaction, however. The acquisition makes strategic sense for Altria, in our opinion, because moves such as this into adjacent categories should help to mitigate declining cigarette sales. However, we think that Altria is paying a rich price, particularly as UST's operating margins are at risk because of continued market share losses that may force the firm to lower prices and/or increase promotions in order to make its premium-priced brands competitive with cheaper alternatives. We will assess the proposed synergies that could be achieved from this acquisition, and their effects on the sales and profitability of the combined entity.


Thesis 08-12-2008

The addictive nature of cigarettes and the strength of the Marlboro brand give Altria a wide moat, in our opinion. However, having separated from its faster-growing international business, Altria faces strong head winds in the declining U.S. cigarette industry, and we expect the firm to move into neighboring tobacco sectors to attempt to offset weakening revenue growth and operating margins.

Tighter consumer spending has accelerated the decline of cigarette volume in recent quarters, and we think a persistently weak economic outlook could lead consumers to increasingly trade down to cheaper brands. With Altria commanding a 62% share of the U.S. premium cigarette market, it could be hurt by a flight to discount products.

In addition, the threat of higher state excise taxes on cigarettes could increase cigarette list prices and put further pressure on the beleaguered U.S. consumer, already feeling the pinch of high food and energy prices. We would expect industry sales to fall further as a result. However, if states continue to levy excise taxes on a per-stick basis, the percentage price gap between premium brands and cheaper discount products should fall. This could be favorable to Altria, whose dominant premium brand--Marlboro--captures around 41% of U.S. cigarette sales.

Altria could at least partially mitigate some of the negative impact of consumers' increasing sensitivity to price if it were able to market its brands. However, wide-ranging restrictions imposed as part of the Master Settlement Agreement prevent tobacco manufacturers from taking part in many forms of advertising.

Amid slumping sales, the company's cost-cutting strategy is sensible in our opinion, but has limited scope. The closure of some operating locations, and the moving of the headquarters to Richmond, Va., may deliver some overhead savings, but they are one-time measures that the company will not be able to replicate going forward. Even Altria's grip on its tobacco farmers may offer only limited opportunities for cost reductions.

Therefore, we believe that Altria will look to neighboring sectors to achieve long-term profit growth. In our opinion, its line extensions such as menthol cigarettes, the market testing of a new Marlboro moist smokeless tobacco product, and its acquisition of cigar manufacturer John Middleton, are wise moves. Smokeless tobacco is one of the few growing tobacco sectors, so we would not be surprised to see Altria attempt to penetrate this market soon.


Valuation

After taking a fresh look at our analysis, we are maintaining our fair value estimate of $26 per share. We are assuming that the industry will decline at around 4% this year and next, then at a 3.5% annual rate. This is at the conservative end of most predictions, which we feel is justified by the recent trends in shipment declines and the waning ability of manufacturers to pass on price hikes to customers. The acquisition of John Middleton will have a small positive impact on sales, but without further consolidation or organic growth in adjacent sectors, it will be difficult for Altria to avoid the shrinkage affecting the U.S. cigarette industry.

Although we expect a 5% increase in revenues in 2008, we are pricing in modest top-line declines thereafter. We think that because of the company's cost-savings program, operating margins will improve to 33% this year, but from 2009, we expect operating margins to run at around 32%, assuming management can trim overhead in line with volume declines.


Risk

Despite signing up to the Master Settlement Agreement a decade ago, litigation remains the largest threat to tobacco manufacturers. The industry has won some battles recently. However, the war wages on, and the risk of further litigation remains an unpredictable threat to our valuation.

Persistent economic weakness could further harm volumes, as consumers find it more difficult to afford premium cigarettes. Increased regulation is also a risk. We think that the proposed FDA legislation could be a mixed blessing for the tobacco industry.

Close Competitors TTM Sales $Mil Market Cap $Mil
Altria Group Inc. 74,116 42,307
* Reynolds American, Inc. 8,923 14,866
* CG:USA 4,072 7,815
* UST, Inc. 1,991 9,878
Data as of 06-30-08

Strategy

Altria's three-pronged strategy to offset the declining cigarette industry includes taking moderate amounts of market share from competitors through effective marketing strategies; achieving growth in adjacent categories, such as smokeless tobacco and cigars both through organic growth and acquisition; and reducing costs at a rate that exceeds volume declines.

Management & Stewardship

Mike Szymanczyk took the reigns of Altria in March 2008 from Louis Camilleri, who took the CEO position at the newly formed Philip Morris International. Szymanczyk is capable and experienced in our opinion, but we would prefer to see the roles of chairman and CEO split between two individuals.

Although 75% of the board do meet the strict definition of independent directors, two directors have served for 19 and 32 years, respectively, and this could compromise their independence. With the presence of the CEO and former CFO in the boardroom, we believe the independence of the board could be stronger.

We think that executive compensation at Altria is generous. CEO Camilleri's total compensation in 2007 was valued at $24 million, and $33 million in 2006, significantly higher than the company's competitors'. However, the company has a long-term incentive plan based upon restricted and deferred stock, and base salaries represent a small proportion of executives' total compensation. We believe that this aligns the interests of the management with those of the shareholders. We would, however, like to see more transparency as to how executive performance is measured.


Profile

Altria comprises Philip Morris USA, John Middleton, and Philip Morris Capital, and it owns a 28.6% stake in SABMiller. PM USA is the largest manufacturer and distributor of cigarettes in the U.S. John Middleton is the second-largest manufacturer of machine-made cigars, led by its Black & Mild brand. PMCC specializes in leveraged and direct finance leases, but no longer accepts new investments. SABMiller is the world's largest brewer.

Growth

Industry volume is expected to fall between 3% and 4% annually, and we are skeptical about Altria's ability to offset this decline with price hikes. We expect Altria's long-term growth to come from the growing cigar and other tobacco sectors.

Profitability

Despite the head winds, the tobacco industry is still quite profitable. Altria has a history of generating operating margins of around 30% and strong returns on capital. If the company can trim costs in line with volume declines, we expect that to continue.

Financial Health

Altria maintains a strong balance sheet, allowing it to announce a share buyback program and generous dividends during the next couple of years. However, any surprise volume declines or litigation setbacks could lead to heightened debt levels.

Bulls Say

Altria is the largest player in U.S. tobacco manufacturing, with just more than 50% market share. Its nearest competitors are Reynolds American (29%) and Lorillard/Carolina Group (10%).


Marlboro is the dominant cigarette brand, with a 41% share. Through its lead brand, Altria continues to nibble away at competitors' market shares despite the heavy restrictions on advertising imposed on the industry.


Altria has monetized its size and strength, generating solid returns on capital and free cash flow. This has allowed it to return capital to shareholders through dividends and stock buybacks.


Altria branched out into the cigar sector last year with the purchase of John Middleton. The strength of the Black & Mild brand should provide a boost to Altria's top line.


Altria still has other growth opportunities to explore. It is currently testing a Marlboro-branded moist smokeless tobacco product, which could help to mitigate declining cigarette sales.


Bears Say

The U.S. cigarette industry is in a long-term decline because of health concerns and strict marketing restrictions. We expect industry volumes to fall 3% to 4% a year going forward.


The breakup of Altria has rendered PM USA heavily reliant on the feat of the U.S. tobacco industry. It is also unclear how the Marlboro brand will fare being stretched across two firms taking different strategic directions.


The weak economic outlook and the threat of higher excise taxes could result in consumers trading down. This would have negative pricing and volume effects for premium brands such as Marlboro.


If the House bill passes in the Senate, FDA regulation of the tobacco industry could hamper manufacturers' efforts to diversify through new product lines.


Although the environment is improving, the threat of litigation constantly hangs over tobacco manufacturers, particularly in the U.S. A fresh wave of lawsuits could hurt Altria's profitability.

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Op zaterdag 22 november 2008 11:08 schreef pberends het volgende:

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Die p/e's kloppen natuurlijk allemaal voor geen reet meer, das het probleem .

Alhoewel het wel iets kan zeggen over de toekomst als de economie weer aantrekt.

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Op zondag 23 november 2008 10:16 schreef slap het volgende:
AMG doet nu 6,74, ik had deze voor 2009 idd op m'n wensenlijst, maar is misschien nu al aardig om in te stappen?
Een korte rally kan fijn zijn en zal dan zeker wel winst nemen tussentijds, maar ook voor LT lijkt me deze aardig.
Kan iemand z'n mening geven over dit fonds om op zeer korte termijn aan te schaffen, bvd.
Met name vraag ik me af wat vooruitzichten zijn, omzet- dan wel winstverwachting en in hoeverre ze schuldenvrij zijn.
thnxx

//edit
oja
Ik wil natuurlijk een gespreide port. Dus AMG wordt vervangen door AM of FUR. Wat is de aanterekkelijkste denken jullie?

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Op dinsdag 2 december 2008 15:48 schreef Koen465 het volgende:
Op 'n gegeven moment kán het gewoon niet slechter met een bedrijf gaan zodat koopjesjagers zoals ik de aandelen opkopen. Ik heb dit niet met echt geld gedaan.

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Op vrijdag 21 november 2008 21:14 schreef Richie_Rich het volgende:
Wat zijn jullie meningen over Altria Group (Philip Morris), laat al jaren dikke winsten zien en de p/e is momenteel iets van 5.

Tevens denk ik niet dat roken echt onder de crisis gaat leiden

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Op dinsdag 2 december 2008 18:14 schreef arjan1212 het volgende:

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Kun je mij uitleggen wat het verschil is tussen het aandeel altria en het aandeel Philip Morris?

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Op dinsdag 2 december 2008 18:40 schreef arjan1212 het volgende:
bedankt, maar dan zou ik zeker geen altria kopen,amerikanen roken niet meer.

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Op dinsdag 2 december 2008 20:28 schreef arjan1212 het volgende:
het is een gevoel. heb jij cijvers van hoeveel % van de amerikanen rookt , jong en oud ?

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Op dinsdag 2 december 2008 20:28 schreef arjan1212 het volgende:
het is een gevoel. heb jij cijvers van hoeveel % van de amerikanen rookt , jong en oud ?