Upload
archit-sharma
View
1.078
Download
0
Embed Size (px)
DESCRIPTION
Finance 101 final presentation on Altria Group
Citation preview
Altria Group, Inc. – Update
Group 5: Michelle Darmawan Zhang Chenxi Manasvi Garg Archit Ajit Sharma Ho Qian Ying Adeline
Disclaimer
This study is purely for academic purposes. All investments are subject to market risk. Please read the report carefully before investing. The group shall not be held responsible for any loss made by following the recommendations made in the following sections.
ALTRIA – The Company
• Introduction • Industry Overview • SWOT Analysis • Financial Ratios • Long Term Financing Structure • Stock Analysis
• RECOMMENDATIONS
Subsidiaries
1. Phillip Morris USA Inc.
2. U.S. Smokeless Tobacco Company
3. Ste. Michelle Wine Estates Ltd
4. John Middleton Co.
5. Phillip Morris Capital Corporation
Business Segment Overview
1. Cigarettes
2. Cigars
3. Smokeless Products
4. Wine Products
5. Phillip Morris Capital Corporation
85%
3% 6%
2% 4%
Net Revenue Breakdown by Business Segment
Cigarettes
Cigars
Smokeless Products
Wine Products
Phillip Morris Capital Corporation
Competitive Landscape
1. Declining smoking consumption
! " # $ % & ' ( $ ) * + , ' - . / 0 ' ' ' ! " # $ % & ' # ( ) * + , * + & % - +" * # " $ % ' (.% " ( * - & + ! / !
!"!
" " " " " " " " " " " " " " " # $ $ % & ' ' ( ) * + , ( ) - . + ) / , . 0 ( "
+*0(123%4*53(*"%6'4789:9;7<7*
-)1"/.+2$*3." $)" 4$256.," "7.4%*$." $#." 829$" $#2$" $#." +)3.-/1./$" *4"#.23*6:"$2;*/+"$#."$)5299)"*/0(4$-:"2/0"9)/$*/(."$)"%(4#"8)-"/.<"-.+(62$)-:"9#2/+.4=">6$-*2"#24"0)/."-.62$*3.6:"<.66"*/"12*/$2*/*/+"*$4"9(--./$"8-2/9#*4.,"
=>?@0ABC**
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
"
"
"
"
"
"
"
"
2. High Tax Rate
3. Highly susceptible to litigation
• Insurance program reauthorization act of 2009 drastically increased taxes on tobacco products to provide funding for government-sponsored health insurance for illegal aliens and low-income families
4. New opportunities for growth e.g. smokeless products and wine
Major Players & Competitors
1. Reynolds American, Inc. (RAI)
2. British American Tobacco PLC. (BTI)
3. Phillip Morris International (PM)
SWOT Analysis
STRENGTHS 1. Largest Tobacco Manufacturer 2. Company is well established 3. Company stock is generally not volatile, with a beta ratio of only 0.43
WEAKNESS 1. Declining smoking rates 2. Cigarettes are the only driving force in company 3. High competition
OPPORTUNITIES 1. Acquisitions can be extremely profitable 2. Smokeless products proved to be growing trend in consumers.
THREATS 1. Illegal brands can compromise market share 2. High taxes can threaten growth 3. Social pressures discourages smoking.
FINANCIAL STATEMENT ANALYSIS
Profitability
0%
5%
10%
15%
20%
25%
30%
35%
2008 2009 2010 2011 2012
Altria
Reynold
Lorillard
NET PROFIT MARGIN
Dividends
0%
20%
40%
60%
80%
100%
120%
2012 2011 2010 2009 2008
Altria
Reynold
Lorillard
0%
2%
4%
6%
8%
10%
12%
2012 2011 2010 2009 2008
Altria
Reynold
Lorillard DIVIDEND PAYOUT RATIO
DIVIDEND YIELD
Industry average: 3.4%
Return on Assets & Equity
RETURN ON EQUITY
RETURN ON ASSETS
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
2008 2009 2010 2011 2012
Altria
Reynold
Lorillard
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
300.00%
2008 2009 2010 2011 2012
Altria
Reynold
Lorillard
Liquidity
0
0.5
1
1.5
2
2.5
2008 2009 2010 2011 2012
Altria
Reynold
Lorillard
CURRENT RATIO
0.0
50.0
100.0
150.0
200.0
250.0
300.0
2008 2009 2010 2011 2012
CCC
Days Sales Oustanding Avg days in Inventory Days payables Outstanding
Components of Altria Cash Conversion Cycle
Efficiency of Cash Conversion
0.000
50.000
100.000
150.000
200.000
250.000
300.000
2008 2009 2010 2011 2012
Altria Reynold Lorillard
Comparisons of Cash Conversion Cycle
Efficiency of Cash Conversion
Comparison of Debt-to-equity Ratio
Solvency
-10
-8
-6
-4
-2
0
2
4
6
8
10
2008 2009 2010 2011 2012
Altria
Reynold
Lorillard
LONG-TERM FINANCING
Capital Structure
Long-term Debt to Equity
Total Debt to Equity
Total Debt to Assets
12,419 / 3,168 = 3.9201
32,161 / 3,168 = 10.1518
32,161 / 35,329 = 0.9103
Debt > Equity
Cost of Capital
g = 2% D1 =1.880 P0 = 31.44
Cost of Equity =
7.98%
Cost of Debt = 6.7%
Cost of Capital Weighted Average Cost of Capital (WACC)
wdrd(1-T) + wprp + wsrs
(0.9103)(0.067)(1-0.296) + (0.0897)(0.0798) = 0.04293 + 0.00715806
= 5.009%
Low WACC Good investment
STOCK ANALYSIS
Stock Price Analysis
Stock Price Movements of Altria from May ‘11 to March ‘13
Investment Risks • Premium Brand Sale Decline
• Adverse Litigation and Legal Issues
• Decrease in Consumer Demand ▫ Public awareness of health risks associated with
smoking ▫ Social acceptability of smoking
• Government Regulation ▫ Cigarette taxes ▫ Restriction on Smoking
Quantifying Risk
• Capital Asset Pricing Model (CAPM): ▫ Risk free rate: Rf = 2.04 (10yr US Treasury Bond Yield) ▫ Cost of Equity/Return: Rs = 1.880/31.44 + 0.02 = 7.98%
β: 7.98=2.04+β (RM-RF) where Rf =2.04 and Rm = 16.40
β =0.41
Stock Valuation
Absolute Valuation Model
“True" value of a firm
based on the dividends
DIVIDEND GROWTH
MODEL
PRICING MULTIPLES OF OTHER
FIRMS
Relative Valuation Model
P/E ratio focuses on earnings of the company, which drives investments
value
Dividend Growth Model
$35.85: Undervalued by 14.03% taking $31.44 as current stock price
Terminal growth rate = 2% Steady State – Year 6 onwards
Multiples of Other Firms • Lorillard Altria EPS x Lorillard PER
2.21 x 13.84 $30.59
• Reynolds American Altria EPS x RAI PER
2.21x 18.50 $40.89
Average Stock Price: $ 35.74
VERDICT
• UNDERPRICED
ALTRIA STOCK
Sensitivity Analysis • Stock price vs. Terminal growth rate (g) and COE (rs)
Terminal Growth rate
(g)
Cost of Equity (rs) 7.68% 7.78% 7.88% 7.98% 8.08% 8.18%
1.25% 29.24 28.79 28.36 27.93 27.53 27.13
1.50% 30.42 29.94 29.47 29.01 28.57 28.14
1.75% 31.70 31.18 30.67 30.18 29.70 29.24
2.00% 33.10 32.53 31.97 31.44 30.92 30.42
2.25% 34.62 34.00 33.39 32.81 32.25 31.70
2.50% 36.29 35.61 34.94 34.31 33.69 33.10
Results
• Stock price of the Altria group is very sensitive to changes
• Terminal growth rate of 2% roughly matches the forecasted growth of the US economy
� Altria stock price should remain stable
RECOMMENDATIONS
RECOMMENDATIONS Consistently strong performer Undervalued according to both methods Commanding industry position Regular dividend payouts Unlikelihood that any new tobacco rivals will emerge No. 1 in the sales in the US tobacco market
BUY for the Altria Group, Inc.’s stock in the short term.
HOLD in the long term
Uncertainty surrounding the tobacco industry Low terminal growth rate of 2% Highly sensitive to the terminal growth rate Cigarette sales constitute a massive 85% share of Altria’s sales revenue Growing inclination of consumers towards smoke-free cigarette substitutes and smokeless products
RECOMMENDATIONS