Altria Group Inc.MO

Morningstar Rating

Stock Research and Analysis

by Philip Gorham, CFA

The addictive nature of cigarettes and the strength of the Marlboro brand give Altria a wide economic moat, in our opinion. However, having separated from its faster-growing international business, Altria faces strong head winds in the declining U.S. Read more

Bulls Say

Altria is the largest player in U.S. tobacco manufacturing, with just more than 50% market share. Its nearest competitors are Reynolds American (29%) and Lorillard/Carolina Group (10%).

Marlboro is the dominant cigarette brand, with a 41% share. Through its lead brand, Altria continues to nibble away at competitors' market shares despite the heavy restrictions on advertising imposed on the industry.

Altria has monetized its size and strength, generating solid returns on capital and free cash flow. This has allowed it to return capital to shareholders through dividends and stock buybacks.

By acquiring UST, Altria has consolidated its position as the leading U.S. tobacco firm, and the addition of smokeless products should improve its sales growth and boost operating margins.

Altria branched out into the cigar sector with the purchase of John Middleton. The strength of the Black & Mild brand should help Altria's top line. Read more

Bears Say

The U.S. cigarette industry is in long-term decline because of health concerns and strict marketing restrictions. We expect industry volume to fall 3%-4% a year.

The breakup of Altria has rendered PM USA heavily reliant on the fate of the U.S. tobacco industry. It is also unclear how the Marlboro brand will fare being stretched across two firms taking different strategic directions.

The weak economic outlook and the threat of higher excise taxes could result in consumers trading down. This would have negative pricing and volume effects for premium brands such as Marlboro.

If the House bill passes in the Senate, FDA regulation of the tobacco industry could hamper manufacturers' efforts to diversify through new product lines.

Although the environment is improving, the threat of litigation constantly hangs over tobacco manufacturers, particularly in the U.S. A fresh wave of lawsuits could hurt Altria's profitability. Read more

Strategy

Altria's three-prong strategy to offset the declining cigarette industry includes taking moderate amounts of market share from competitors through effective marketing strategies; achieving growth in Read more

Management

Mike Szymanczyk took the reins of Altria in March 2008 from Louis Camilleri, who took the CEO position at the newly formed Philip Morris International PMI. Szymanczyk is capable and experienced, in our opinion, but we would prefer to see the roles of Read more

Profile

Altria comprises Philip Morris USA, John Middleton, and Philip Morris Capital. It also owns 28.6% of SABMiller, the world's largest brewer. PM USA is the largest manufacturer Read more

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