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TheDumbMoney (38.60)

Updated Altria Valuation and FCF Analysis, Including SAB Miller "Look Through" FCF

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April 18, 2012 – Comments (0) | RELATED TICKERS: MO , RAI , LO

My Conclusions:

Valuation: Altria is overvalued, or at best is pretty darn fairly-valued. My best guess is that it is worth in the neighborhood of $30.08/share. Currently it is trading at $31.61/share, so is is mildly overvalued. I set a tentative “buy” price at the 20% downside, or $24.50ish/share, and a tentative “sell” price at the 20%-above-valuation upside, or $36.70ish/share. Note that I’m uncomfortable using the 8% estimated WACC for my discount rate, instead of a 10% rate. If I am wrong about that, then I am undervaluing the firm (and the entire industry) by quite a bit.

Caution: The letter of the retiring Chairman & CEO is disingenuous about adjusted earnings, in my opinion. I get it, he’s retiring and wants to make a so-so year look good, but come-on.

Currency Issues: Ironically, because of the extent to which Altria is properly valued based on its SAB Miller stake, and because of the hedging that Philip Morris International (“PMI”) does, Altria is much more of a currency arbitrage play than PMI is.

Idea: I should strongly consider selling this stock, particularly given my already large investment in PMI. At the very least, it is a good candidate for cash-raising, should I identify another opportunity that I am otherwise unable to fund the purchase of. However, the opportunity in SAB Miller remains great, as does the potential for the market to undervalue it. And it’s definitely the best U.S. tobacco stock to own, if you’re going to own one.

Comparison:  Altria is still a vastly better investment than the other two major US tobacco companies, LO and RAI.

Dividend: The payout ratio seems abnormally high because of a one-time charge this year, but will drop into the seventies within the next year.

For the full analysis, see here.  To look at the relevant spreadsheets I have created and that are viewable in Google Documents, see here, here, here, here, here and here.

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