Altria Group Inc (NYSE:MO)
In the fourth-quarter of 2012, Altria’s revenue increased by around 3.6%, driven by higher pricing for its products. The company declared an EPS of $0.55 which was in line with the consensus estimate. For 2012, the company’s total cigarette shipment volumes declined only 0.2%, as compared to the industry average of 2.3%. Altria’s signature product Marlboro has gained in market share in the last quarter and reached 42.6%. The growth seen in the brand was due to its new products such as Marlboro Black NXT, Marlboro Southern Cut, etc. I see upside in the stock from its robust cost saving plan, expected MSA payment credit, and lower tax rate.
The targeted cost saving for 2013 is around $400 million. The cost saving plan includes cutting down the number of employees, improvement in its processes, amalgamating some facilities to achieve synergy, etc. The goal is achievable considering that Altria has already taken initiatives in 2012 to meet the required cost reduction.
Altria will get an MSA credit in April 2013 worth $450 million. Although there has been no clear guidance by the company, the amount saved could be returned to investors in the form of dividend or share buybacks.
The company has a high forward dividend yield of 5.1% with an 80% payout ratio. Altria’s commitment to pay its investors is backed by a strong portfolio, cost reduction plan, and credit in MSA payments. I recommend the stock as a buy.
Lorillard Inc (NYSE:LO)
Lorillard reported a fourth-quarter growth in revenue of 5.3%, propped up by strong pricing and improved volumes in the cigarette segment. In the quarter, the incremental sale of e-cigarettes drove most of the operational growth. The segment’s operational margin came out at 18%. Lorillard currently holds 30% of the e-cigarette market.
The company’s e-cigarette category is turning out to be a profitable investment. In April 2012, when Lorillard bought blu eCigs, the annual sale of blu e-cigarettes was around $45 million. In the quarter alone the sales for the product reached around $39 million, reflecting good demand and the increased reach of e-cigarettes. E-cigarettes are now available in more than 50,000 stores and soon enough will be available in another 25,000 stores. E-cigarettes maintain a high gross margin ratio of 41%, less than the 51% of the regular cigarettes. In addition to this, e-cigarettes don’t have the marketing constraints that regular cigarettes have. The company is facing some supply shortages because the current e-cigarettes are made manually in China. The segment grew nearly 300% quarter-over-quarter. Looking at growth and return, I feel the product has a lot of potential for the future.
Additionally, of the three stocks discussed, Lorillard is the one with maximum exposure to the FDA. It has some substantial equivalence applications and peer review of the menthol report approval, which may get an extension, and a few products in the pipeline like menthol and non-menthol gold products. The leadership of Lorillard in the menthol cigarette market is its greatest asset. Such products generate most of the company’s revenue. This accompanied with the growth possibility of e-cigarettes makes my faith in the stock stronger. I recommend a buy.
The investing opportunities
I am bullish on Lorillard and Altria Group. The progress in the sale of e-cigarettes and leadership in the menthol cigarette market strengthens my faith in Lorillard. The stock should see some upside in future. Altria and Reynolds will benefited from their respective cost cutting plans and MSA payment credits. On the other hand, the continuous decline in Reynolds’s volumes and its crossing the average industry decline raises some concerns for this stock. Hence I recommend a buy for Altria, but a neutral rating for Reynolds.
The article These Tobacco Stocks are Hard to Quit originally appeared on Fool.com and is written by Shweta Dubey.
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