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Altria: The Selloff Is Justified To Create A Better Buy (NYSE:MO)


Philip Morris Changes Name To Altria

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Price Action Thesis

We follow up with a detailed price action analysis on our recent Altria Group, Inc. (NYSE:MO) article, given the recent FDA ban on Juul products. We had cautioned investors in early June not to add then, as its valuation was not attractive. Also, its price action was not constructive yet.

Notably, the market had already set up a bull trap (significant rejection of buying momentum) in early May, setting up early warning signs that MO could enter a rapid liquidation phase subsequently.

As a result of the recent tumble (28% decline from its May highs), it also took out its November 2021 bear trap (significant rejection of selling momentum), setting up its near-term support. Moreover, the price action structure is constructive and could form a potential bear trap.

We think a technical buy call here makes sense (but we must caution a bear trap has not been validated). In addition, its valuation is also less demanding. But, we must still highlight that the market seems to be expecting MO to underperform the market over the next few years, based on our valuation model.

As a result, we revise our rating on MO from Hold to Technical Buy, with a near-term price target (PT) of $50, implying a potential upside of 15% (from June 24’s close).

MO – Investors Need to Pay Attention To Its Bull Traps

MO price chart

MO price chart (TradingView)

We encourage investors to pay attention to price charts, as they often unveil significant clues to the market’s forward intentions. For example, we highlighted in our previous article that the market had set up a potent bull trap in May, which preceded the recent FDA ruling. Therefore, the stage has been set for MO’s steep decline.

So, we think the market didn’t overreact. Instead, it just needed an opportunity to digest those massive gains, leveraging a “perfect” opportunity of the FDA’s ban to force a steep selldown in MO stock.

Moreover, MO entered into its current rapid liquidation phase in early June. Therefore, the recent move post-FDA ban merely helped MO break its November 2021 bear trap lows to create a potential for a significant bear trap (thus constructive bottoming signals).

Valuation Is Less Demanding – But Could Still Underperform The Market

Investors need to know that Altria can still appeal the FDA ruling. Therefore, it’s not game over yet for Altria. Moreover, Altria had already written down most of its investment (with $1.7B remaining) in Juul. Therefore, we think the impact is less significant than what the price action indicated. Furthermore, Altria can also market its own vaping product if it chooses.

Therefore, despite the ruling, the ban did not materially impact the Street’s consensus estimates on its revenue and adjusted EPS. Goldman Sachs also articulated in its recent commentary (edited):

While the news comes as a bit of a surprise, we don’t believe that all is lost. Altria has several options it can pursue. We have a strong conviction that Altria will be able to deliver on its mid-single digit EPS growth target for FY22 and beyond. – The Fly

Stock MO
Current market cap $78.58B
Hurdle rate (CAGR) 2%
Projection through CQ4’26
Required FCF yield in CQ4’26 10%
Assumed TTM FCF margin in CQ4’26 39%
Implied TTM revenue by CQ4’26 $22.03B

MO reverse cash flow valuation model. Data source: S&P Capital IQ, author

MO delivered a 10Y CAGR of 2.51% (adjusted for dividends), well below the SPDR S&P 500 ETF’s (SPY) 11.31% 10Y CAGR. Therefore, the market is not “foolish.” MO has consistently traded at an FCF yield (10Y mean: 6.9%) well above the market due to its underperformance. As a result, investors must ask whether the market expects MO to overturn its underperformance moving forward?

MO last traded at an FCF yield of 11%. However, the market absorbed the recent selling pressure at a yield of about 11.5%. Given the potential of a bear trap price action, we posit that the market considers an 11.5% yield too high.

But, the market firmly rejected buying momentum at its May bull trap when it traded at an FCF yield of 8.5%. As a result, we believe the market thinks that yield is too low. Therefore, we believe that requiring a yield of 10% seems appropriate to model the market’s expectations of MO’s valuations.

As a result, we think it’s clear that the market expects MO to continue underperforming the market at its current valuation if investors hold it through FY26. Our implied hurdle rate of 2%, based on a revenue target of $22.03B in FY26, indicates Altria’s potential underperformance.

The revised consensus estimates suggest that Altria could post a revenue CAGR of 0.49% from FY21-24. Notably, it’s well below its 10Y revenue CAGR of 2.4% and 5Y revenue CAGR of 1.8%. Hence, investors need to ask themselves why they should expect market outperformance, if Altria’s revenue growth is estimated to be anemic moving forward.

Is MO Stock A Buy, Sell, Or Hold?

We revise our rating on MO from Hold to Technical Buy, with a PT of $50. It implies a potential upside of 15% from June 24’s close.

Our price action analysis suggests a near-term bottom, with a potential bear trap price action. However, it has not been validated and thus is the most significant risk to our price action thesis.

Our valuation model indicates that MO could continue to significantly underperform the market even at the current levels. Therefore, we urge investors to use our PT to cut exposure if it reaches and reallocate to other stocks.

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