Few companies have thrilled investors more than cigarette giant Altria Group, owner of the Philip Morris brand, now a major investor in JUUL Labs after agreeing to pay $ 12.8 billion dollars to the smokeless unicorn worth $ 38 billion. Over the past 10 years, Altria has achieved an annual return of 18.5%, five percentage points higher than the S & P 500 Index. This figure does not even account for the rotation of its holdings in Kraft Foods and Philip Morris International from shareholders. Some investors, such as David Winters of the Wintergreen Fund, have highly rated portfolios like Altria because they detect a powerful combination of dependent clientele, increasing profits and delivering outstanding long-term performance. Altria, after all, earns nearly $ 2 billion a quarter and has a 10% multiple in the price-earnings ratio.
Cigarette sales dropping drastically
Cigarette sales have fallen sharply in the United States, but if you think this affects profits, think again. Citing a BofA study, a drop of about 25% in cigarette sales in the United States between 2005 and 2016 coincided with an increase of about 70% in the profits of the industry. Talk about a sticky product with incredible price power and a flotation. Unfortunately, like its own clients, there are signs that Altria has been digging its own grave over the years. It may not happen today or tomorrow, but time seems to be an inevitable enemy of Altria. This is a surprising reality behind the company’s incredible stock market: Altria had no net debt ten years ago. Now, with a $ 14.6 billion term loan used to buy Juul, Altria will likely have a net debt of more than $ 28 billion and leverage of almost 3 times. Nevertheless, are the growing financial risks of Altria well understood? Maybe not. With the $ 28 billion pro forma debt raised by Altria over the past decade, hardly any of it has resulted in increased revenues. By subtracting excise taxes, Altria sales increased from $ 16 billion in 2008 to $ 19.5 billion in the last 12 months. In other words, more than one dollar of revenue achieved by Altria in 2019 will be accompanied by a dollar of debt. This is in stark contrast to the glory years of tobacco stocks in the 2000s when Altria’s net debt/income ratios were 0.25x to 0.33x and the significant revenues came from Oreo nonlethal biscuits and Oscar Meyer hot dogs, made by Kraft Food. As Altria gets up, will it be able to rely on calculations, on which it cannot find a better stock to bet on in the next decade? Tobacco companies have solved the problem of lowering cigarette consumption by raising their prices. There is no doubt that profits are going well.
Search for alternatives
The cigarette manufacturers sold half a trillion cigarettes a year in the United States; now this figure is directed at 250 billion. This is not a problem if smokers pay more per puff. The small number of customers in the industry has simply been infiltrated over the years. But will this reduction in the smoking cohort – each much more important to Altria than in the past – act in the same way in the future? Altria seems worried. Why invest billions of dollars in brands of smokeless cigarettes like Juul and Nu Mark, and cannabis companies like Cron Group? However, so far, Altria’s investments in smokeless products have not been able to boost growth and it remains to be seen whether these bets will ultimately become useful. In the past nine months, Altria’s $ 150 million smokeless sales growth did not offset lower sales of cigarettes and cigars. Total excise duty-free revenues have changed little. However, these investments are better for investors like Winters of the Wintergreen Fund, which has invested about 5% of its portfolio in Altria.