Finance Presentation on Altria Group

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Finance 101 final presentation on Altria Group

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Finance Presentation on Altria Group

  1. 1. Altria  Group,  Inc.  –  Update Group 5: Michelle Darmawan Zhang Chenxi Manasvi Garg Archit Ajit Sharma Ho Qian Ying Adeline
  2. 2. 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.
  3. 3. ALTRIA – The Company •  Introduction •  Industry Overview •  SWOT Analysis •  Financial Ratios •  Long Term Financing Structure •  Stock Analysis •  RECOMMENDATIONS
  4. 4. 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
  5. 5. Business Segment Overview 1. Cigarettes 2. Cigars 3. Smokeless Products 4. Wine Products 5. Phillip Morris Capital Corporation
  6. 6. Net Revenue Breakdown by Business Segment 2% 4% 3% Cigarettes 6% Cigars Smokeless Products Wine Products 85% Phillip Morris Capital Corporation
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  8. 8. 2. High Tax Rate
  9. 9. 3. Highly susceptible to litigation • Insurance program reauthorization act of 2009 drastically increased taxes on tobacco products to provide funding for governmentsponsored health insurance for illegal aliens and low-income families 4. New opportunities for growth e.g. smokeless products and wine
  10. 10. Major Players & Competitors 1. Reynolds American, Inc. (RAI) 2. British American Tobacco PLC. (BTI)
  11. 11. 3. Phillip Morris International (PM)
  12. 12. SWOT Analysis STRENGTHS WEAKNESS 1. Largest Tobacco Manufacturer 2. Company is well established 3. Company stock is generally not volatile, with a beta ratio of only 0.43 1. Declining smoking rates 2. Cigarettes are the only driving force in company 3. High competition OPPORTUNITIES THREATS 1. Acquisitions can be extremely profitable 2. Smokeless products proved to be growing trend in consumers. 1. Illegal brands can compromise market share 2. High taxes can threaten growth 3. Social pressures discourages smoking.
  13. 13. FINANCIAL STATEMENT ANALYSIS
  14. 14. Profitability 35% 30% 25% 20% Altria Reynold 15% Lorillard 10% 5% 0% 2008 2009 2010 2011 NET PROFIT MARGIN 2012
  15. 15. Dividends 12% 10% 8% Altria 6% Reynold 4% Lorillard 2% DIVIDEND PAYOUT RATIO 120% 0% 2008 2009 2010 2011 2012 100% 80% DIVIDEND YIELD Industry average: 3.4% Altria 60% Reynold 40% Lorillard 20% 0% 2008 2009 2010 2011 2012
  16. 16. Return on Assets & Equity 50.00% 40.00% 30.00% Altria 20.00% Reynold Lorillard 10.00% RETURN ON EQUITY 0.00% 2008 2009 2010 2011 2012 RETURN ON ASSETS 300.00% 250.00% 200.00% Altria 150.00% Reynold 100.00% Lorillard 50.00% 0.00% 2008 2009 2010 2011 2012
  17. 17. Liquidity 2.5 2 1.5 Altria Reynold 1 Lorillard 0.5 0 2008 2009 2010 2011 CURRENT RATIO 2012
  18. 18. Efficiency of Cash Conversion 300.0 250.0 CCC 200.0 Days Sales Oustanding Avg days in Inventory Days payables Outstanding 150.0 100.0 50.0 0.0 2008 2009 2010 2011 2012 Components of Altria Cash Conversion Cycle
  19. 19. Efficiency of Cash Conversion 300.000 250.000 200.000 Altria 150.000 Reynold Lorillard 100.000 50.000 0.000 2008 2009 2010 2011 2012 Comparisons of Cash Conversion Cycle
  20. 20. Solvency 10 8 6 4 2 Altria 0 Reynold -2 2008 2009 2010 2011 2012 -4 -6 -8 -10 Comparison of Debt-to-equity Ratio Lorillard
  21. 21. LONG-TERM FINANCING
  22. 22. Capital Structure Long-term Total Debt to Total Debt to Debt to Equity   Assets   Equity   12,419 / 3,168 = 32,161 / 3,168 = 32,161 / 35,329 3.9201   10.1518   = 0.9103   Debt > Equity
  23. 23. Cost of Capital g = 2% D1 =1.880 Cost of Equity = 7.98% P0 = 31.44 Cost of Debt = 6.7%
  24. 24. Cost of Capital Cost of Capital (WACC) Weighted Average 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
  25. 25. STOCK ANALYSIS
  26. 26. Stock Price Analysis Stock Price Movements of Altria from May ‘11 to March ‘13
  27. 27. 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
  28. 28. 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
  29. 29. Stock Valuation DIVIDEND GROWTH MODEL PRICING MULTIPLES OF OTHER FIRMS Absolute Valuation Model Relative Valuation Model “True" value of a firm based on the dividends P/E ratio focuses on earnings of the company, which drives investments value
  30. 30. Dividend Growth Model Terminal growth rate = 2% Steady State – Year 6 onwards $35.85: Undervalued by 14.03% taking $31.44 as current stock price
  31. 31. 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
  32. 32. VERDICT •  UNDERPRICED ALTRIA STOCK
  33. 33. Sensitivity Analysis •  Stock price vs. Terminal growth rate (g) and COE (rs)                 Terminal   Growth  rate   (g)     7.68%   Cost  of  Equity  (rs)   7.78%   7.88%   7.98%   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   8.08%   8.18%  
  34. 34. 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
  35. 35. RECOMMENDATIONS
  36. 36. 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.
  37. 37. RECOMMENDATIONS 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 HOLD in the long term

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