Altria: Temporary Q3 Weakness, Permanent Strategic Missteps

(Preview) Company Update (MO US) (Buy)

Summary

• Altria released weak Q3 results last Thursday, with cigarette volume down 10% and half of its 4.9% EPS growth from buybacks.

• We can look past the decline as driven by macro headwinds and a reversal of COVID benefits, not Reduced Risk Products.

• Worse, Altria will return U.S. IQOS rights to Philip Morris, and neither its own products nor the new Japan Tobacco JV is a good substitute.

• Disruption of the U.S. market will take time, and Altria's valuation is undemanding, with a 9.5x P/E and an 8.1% Dividend Yield.

• With shares at $46.14, our base case is for a total return of 50% (15.5% annualized) by 2025 year-end, and we retain our Buy rating for now.

Introduction

Altria Group, Inc. had an eventful late October, agreeing to hand back its U.S. IQOS license to Philip Morris on October 20, releasing Q3 2022 results last Thursday (October 27) as well as announcing a new partnership with Japan Tobacco on the same day. Shares have gained 3% since October 20.

We upgraded our rating on Altria to B…