Altria Group Inc (MO)

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Why Altria’s Stock Could Be a Buy and Philip Morris Isn’t
By: Barron's | March 22, 2022

Altria Group has been the standout in Big Tobacco this year, and Goldman Sachs argues that strength looks set to continue, thanks to its defensive, domestic-focused business, making it a better buy than Philip Morris International .

Analyst Bonnie Herzog raised her rating on Altria (ticker: MO) to Buy from Neutral and her price target to $57 from $48. By contrast, she cut her rating on Philip Morris (PM) to Neutral from Buy, and lowered her price target to $100 from $116.

Altria stock was up 2.3%, at $53.43, in early Tuesday trading, while Philip Morris stock was up 0.6%, at $94.66. The S&P 500 was up 0.4%.

Not surprisingly, a lot of Herzog’s decision is down to the current geopolitical situation. She calls Altria “an attractive investment in the current risk-off environment as investors become increasingly concerned about stagflation, placing a greater premium on U.S. based companies with strong free cash flows, high and stable margins and attractive FCF [free cash flow] and dividend yields.”

Altria stock has a 6.9% dividend yield and an average annual FCF generation of around $8 billion over the past three years.

Herzog also highlights the company’s strong margins and balance sheet, the loyalty of its Marlboro customer base, and the shares’ valuation. With its shares trading around 10 times her fiscal 2023 estimates, they stand at an 18% discount to their five-year historical average and a 47% discount to the S&P 500.

By contrast, she thinks the Russian invasion of Ukraine has clouded the picture for Philip Morris. The two countries account for about 8% of Philip Morris’s business, and Herzog is concerned that the company will have to lower its full-year guidance, given the disruption and unfavorable currency exchange rates.

The conflict could also weigh on Philip Morris’s long-term targets for its heat-not-burn tobacco device iQOS, she warns, which may also see headwinds from semiconductor shortages.

She’s still confident about the company’s long-term prospects. “Philip Morris is in the middle of an impressive transformation of its business (and industry) to deliver a smoke-free future which we believe will ultimately create long-term shareholder value,” she writes. Yet there are too many uncertainties for her to stay bullish at the moment.

Herzog isn’t the only analyst worried about Philip Morris’s exposure to Ukraine and Russia. At the end of 2021, 72% of the analysts tracked by FactSet had a Buy rating or the equivalent on Philip Morris, but that figure has dropped to around half today. The shares have been lower since the invasion, and the company suspended investments in Russia earlier this month.

Altria, by contrast, isn’t very popular on the Street, with just 37% of analysts bullish on the stock. It did report a better-than-expected quarter in January, and Philip Morris’s most recent report in February also topped estimates.

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