July 17, 2020 - 5:23pm EST by
2020 2021
Price: 41.54 EPS 4.27 4.51
Shares Out. (in M): 1,861 P/E 9.8 9.2
Market Cap (in $M): 77,204 P/FCF 10.2 10
Net Debt (in $M): 1,281 EBIT 11,150 11,583
TEV ($): 78,485 TEV/EBIT 7.1 6.8

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  • Tobacco


This is a simple pitch. Altria (MO) was written up about 8 months ago. The price is about the same today as it was then. We all know what they do (cigarettes, dip and JUUL)

The risks are pretty obvious. 

  • Volumes are declining and should continue to decline ~4% into the future. Pricing has to rise to match this or at least partially offset it


  • The FTC is coming after flavored cigarettes (menthol, etc.) 


  • The FTC is coming after JUUL to unwind it


  • ESG investing is real and will be e negative flow for assets like this meaning you are fighting an uphill fund flows battle


  • It’s just in the US so you don’t get any offset from non/less-declining markets


What we really like about it is the upside is also really obvious:

  • 50%+ EBITDA margin (93% 5yr avg ROE) business that is expected to continue to grow revenues/cash flows that trades at 9x earnings and free cash flow 


  • 8.1% dividend yield is real cash in your pocket and there aren’t that many things they can do with that money to grow their empire (although they certainly could buy back a lot of stock down here which would reduce their cost of capital given yield so high relative to debt).


  • JUUL whether owned by them or someone else is a VERY real asset. This is a wonderful device for people looking to quit. If it is spun out or IPO’d the Robinhood crowd will get their hands on JUUL stock as they are puffing on their JUULs daytrading. Whether or not MO benefits who knows but that is an interesting proposition


  • We are in an era of extremely low rates very likely for much longer. This should be positive for companies that have the cash flow to maintain high dividend yields because people are starved for yield. 


  • The analysts really don’t like this. Putting an 8-9x PE target + JUUL in this environment should be all you need to know about this. 5yr average P/E is 17x (before rates got to where they are today).


We know the market is really about are things getting better or worse on the margins. Narratives also flip. One of the keys is can you see what the narrative flip is before it happens. It generally happens after the stock has run. 

We think the odds of a narrative flip here are solid and over a period of time this becomes recognized as nominally stable business with a lot of cash in a world where yields are super muted. 

Although many people deride technical analysis it helps us a lot at least in terms of thinking of entry points and what might happen based on supply/demand. If we all buy into the computers/algos being super important you have to understand the technicals because they are coded to pay attention to them. The technicals here are becoming positive as you have a rising wedge with short and long-term MACDs going on buy signals. Shorter-term EMAs beginning to move higher as well and 200-day close to flattening out. A breakout from these levels would likely turn the 200-day up and cause many more folks to jump onboard.


Longer-term it needs to get above and stay above $45-50 to break out of a three year negative downtrend. This is where the narrative comes in. Price action drives narrative a lot of times and if it breaks that around $50 which is where the analysts tend to be ($40-$50) the odds are very high the narrative will flip and analysts will start raising price targets building positive momentum for the stock.


In Summary:

  • Cheap, highly cash generative business that is most of its FCF back to shareholders

  • While business has been in perpetual decline for decades the stock has historically been a great performer and revs/earnings/FCF have continued to grow

  • Shorter term trends beginning to become more constructive and you get paid a great dividend yield to wait until the trend shifts positively

Reverting to a historical P/E of 15x which is still a massive disconnect from the SPY puts you at about $60-$70. Here is the historical price to dividend which of course would be cut but they just confirmed at the annual meeting they are sticking with 80% of adjusted EPS which is unlikely to completely fall apart. 





This research report expresses our research opinions, which we have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author and his clients have a position in this stock and may add, reduce or sell out of the position completely without informing readers.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Continued lack of earnings deterioration and lower rates for longer

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