MO stock recently broke out, but many technical factors suggest that move should come with a warning label. The fundamentals also raise questions as cigarette demand wanes over time. So is MO stock a good buy?
Altria (MO) in October reported third-quarter results that beat expectations. But the tobacco giant logged yet another write-down on its investment in e-cigarette startup Juul.
Altria — best known for selling Marlboro brand cigarettes in the U.S. — has said its tobacco business has not been hit hard by pandemic-related restrictions. Most retail stores and convenience stores that sell cigarettes and tobacco products have been considered “essential” businesses and remained open. A population deprived of other leisure activity has spent more money on its smoking habits.
The company in July said the cigarette industry has shown “resilience,” as older smokers, anxious over last year’s vaping scare, came back to cigarettes after trying vaping.
In October, the company raised the low end of its full-year profit outlook from $4.30 to $4.38. But it said business conditions remain “dynamic,” as Washington races to clear new stimulus aid.
Altria’s efforts to become less of a cigarette company — through investments in Juul and Canadian pot producer Cronos Group (CRON) — also haven’t come without their share of problems.
Here’s a look at whether any buying opportunity for Altria stock exists against that backdrop.
MO Stock Fundamental Analysis
Top stocks usually have solid underlying earnings growth. But Altria’s earnings growth has been slowing. For 2019, Altria earnings rose 6%, slower than an 18% gain in 2018. In 2020, earnings growth is expected to decelerate further, to a 4% increase.
Overall, MO stock falls far short of the CAN SLIM benchmark for 25% growth in earnings and revenue.
Cowen analyst Vivien Azer, in a research note in July, said customers were “staying at home … and smoking more.”
She added that Altria’s second-quarter results were helped by “the combination of government stimulus, and lower discretionary spending (on gas, entertainment etc.).” That, she continued, “has allowed smokers to increase their nicotine consumption.”
After Altria reported third-quarter results in October she said, “high unemployment combined with recent exacerbating virus trends presents uncertainty,” even as the company indicated consumption trends were holding up.
Altria during that quarter also took a $2.6 billion impairment charge related to its investment in Juul — its fourth such charge. That impairment brought the value of its investment in the startup to $1.6 billion. The impairment, Altria said, was based on its “projections of lower JUUL revenues over time due to lower pricing assumptions and delays in JUUL achieving previously forecasted operating margin performance.”
Azer noted that Juul has turned away from business internationally to focus on North America and the U.K.
Altria in 2018 invested $12.8 billion in Juul, taking a 35% stake in the company. But that bet has run up against concerns tied to vaping and dimmer profit expectations, as legal cases and lawmaker scrutiny piled up amid anger over allegedly misleading health claims.
In January, the FDA said it would remove some vaping products from the market. The agency ordered companies to stop making and selling flavored, cartridge-based e-cigarettes other than tobacco or menthol.
The Federal Trade Commission in April also sued to unwind Altria’s stake in Juul, alleging the move “eliminated competition in violation of federal antitrust laws.” And Juul has cut jobs and shaken up leadership.
Return To Cigarettes?
In prior years, investors grew more worried about fading demand for cigarettes, as customers became more health-conscious. Sales growth for Altria has also been choppy over that time, bouncing between single-digit percentage gains and declines.
However, Altria said in July that more smokers ages 50 and above began smoking cigarettes again after trying vaping.
But many of those customers tended to go for discount-brand cigarettes far more than their younger counterparts. That poses a potential competitive threat to Marlboro and other Altria brands like Nat Sherman, especially if customers lose their jobs.
The company in October said it expected domestic cigarette-industry volumes to be flat to down 1.5% this year, better than an earlier forecast for a decline of 2% to 3.5%.
MO Stock Technical Analysis
MO stock is technically within range of a 41.62 buy point of a cup-with-handle base. The stock began forming the right side of that base in November, as Pfizer (PFE) and partner BioNTech (BNTX) and, separately, Moderna (MRNA) reported that their coronavirus vaccine candidates were highly effective.
But most of the Altria stock base formed below the 200-day moving average, which is not a good sign. MO stock is still in a significant downtrend that started in mid-2017.
The relative strength line for MO stock has been falling for years, recently hitting its lowest levels since 2004. When a stock’s relative strength line goes lower, that means it’s falling behind overall vs. the S&P 500.
Other tobacco stocks, like Philip Morris International (PM) — once a part of Altria — and British American Tobacco (BTI), similarly fell after topping out in 2017. Philip Morris International stock has a 29 Composite Rating. British American Tobacco’s Composite Rating is 44.
Altria Invests In Marijuana Stocks
Meanwhile, a bet on marijuana, via a massive investment in Canadian pot producer Cronos Group (CRON), has yet to pay off. Investors are still waiting for the cannabis industry to clean up its finances.
Altria in 2018 agreed to take a 45% stake in Cronos. The investment could give Altria a new line of sales, amid uncertainty over its cigarette business. It could also give Cronos deeper production resources and help the pot company tap Altria’s regulatory expertise.
But Altria, when it reported results this past October, noted that Cronos continues to be hurt by retail-store closures and capacity limits in the U.S. Cronos owns the U.S. CBD brand Lord Jones.
The pandemic also forced Cronos to take an impairment charge in its second quarter, which Altria booked in the third quarter.
Altria Stock Is Not A Buy
While MO stock is technically in a buy zone, the base formed below its 200-day line. Shares are in a multiyear slide with a long stretch of underperformance vs. the S&P 500 index.
IBD recommends investors focus on stocks that are closer to their highs and that have Composite Ratings of 90 or higher.
Even as older customers rediscover cigarettes, MO stock has mediocre ratings. Shares have been trending lower since 2017, earnings growth is continuing to decelerate, and revenue has also bounced between anemic growth and modest declines.
The bottom line: Altria stock is not a buy. Better buys exist.
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