Download - $MO (NYSE): BUY Nov 23, 2014
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
1/13
ARCapitalAltria Group, Inc.
NYSE: MO
Andy YanChris Ng
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
2/13
Presenters
2
Andy Yan3A Math/FARM
Chris Ng3B Math/FARM
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
3/13
Investment Thesis
3
Amidst the rallying U.S. equities market, fiscal 2015 is a time for prudency due to
global economic, and political instability. It is imperative to choose a stockthat can produce healthy returns, while minimizing downside risks.
Recommendation: BUY, target $57.16, stop $43.65
Volatile
Oil Prices
E.U.
Deflation Risk
Emerging Markets
Slow Down
Altria Group, Inc. is the ideal choice in hedging
against the risk of global economic instability in the
upcoming fiscal year.
Recession-resistant industry
Market dominance
Outstanding margins and FCF
Growth opportunity in e-cigarette market 10
20
30
40
50
60
1/2/13 5/2/13 9/2/13 1/2/14 5/2/14 9/2/14 1/2/15 5/2/15 9/2/15
$49.24
$57.16+16.4%
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
4/13
European Union
BRIC Nations
Macroeconomics
4Source: Trading Economics, U.S. Census Bureau
Declining Growth Historical GDP
Inflation rate 6.59%
2014 Q2GDP growth rate -0.9%
2014 Q2 GDP growth rate 0.25%
Depreciating currency
October WPI fell to 1.77%; 5 year low
Annual GDP growth rate fell to 7.3%
Price of new homes -1.1% in Sept YoY
5-month low PMI at 50.8
Economic uncertainty in
all 4 BRIC nations
Threatens U.S. economic
performance, particularly
its export
4th Largest Trading Partner of U.S. Gloomy Economy
EU17%
Others
83%
2014 YTD Exports:
$208B = 17%
EU18%
Others
82%
2014 YTD Imports:
$311B = 18%
GDP $17,351B
Annual GDP growth rate 1.3%
Unemployment rate 10.1%
High probability of
deflation which could
trigger a recession
Political tension with
Russia, E.U.s 3rd
trading partner
Euro area inflation rate
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
5/13
U.S. Economy
Oil prices
Macroeconomics
5Source: Trading Economics
Causes Effects
Key U.S. Economic Data Bubble in the Equities Market
Rocketing oil prices if
Saudi Arabia manages to
grow its market share
significantly
Surge in U.S. oil production
Insurgency threat in the Middle
East
Initial low oil price
Bleeds out U.S. energy companies
Potential price shock of oil causing
global recession
Energy companies in SPX
decreased 11.2% in value over the
past 3 months
GDP $16,800B
Annual GDP growth rate 3.5%
Inflation rate 1.7%
Unemployment rate 5.8%FED fund rate 0.25%
TMC/GDP ratio at 126.1%
Potential interest rate hike in 2015
Bubble building in the
equities market
Very sensitive tonegative economic
news
Total market cap/U.S. GDP
WTI Crude Index
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
6/13
30
35
40
45
50
11/19/2013 2/19/2014 5/19/2014 8/19/2014
MO SPX
Company Overview
6
Business Overview
Altria is engaged in the manufacture
and sale of cigarettes, cigars,
smokeless products and wine in the
U.S.
Holds approximately 27% of the
economic and voting interest of
SABMiller, the worlds second-
largest brewer measured by revenues
Entered the e-vapor category in
2013 by introducing MarkTenelectronic cigarettes in Indiana and
Arizona
Market Segments by Revenues & Market Share, 2013
80%
10%
7% 2%
1%
Segment Market share
Cigarettes 50.6% Cigars 29.4%
Smokeless
products
55.0%
Wine NA
Others NA
Experienced Management
Historical Performance
Martin J. Barrington
Chairman/CEO
21 years at Altria
David R. Beran
President/COO
38 years at Altria
Quality Shareholders
Key Financials
Source: Company filings, Bloomberg
Share price 49.2452w range 33.8050.09
Mkt cap 97.1B EV 108.9B
Share price 49.24 Net debt 11.8B
Revenues / YoY growth 17.7B/ 0.1%
EBITDA / margin 7.7B/ 43.5%
NI / margin 4.3B/ 24.4%
P/E 19.7x FCF yld 5.53%EV/EBITDA 14.1x ROE 104.4%
10Y beta 0.65 Dvd P/O 81.2%
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
7/13
Industry Overview
7
Emerging
substitutes
Difficult
new
entrants
Weak
buyers
Strong
suppliersIndustry
rivalry
Porters Five Forces
Growth Opportunity from E-cigarette Market Robust M&A
111 112 112118
109 10597 94 93 93
88
0
20
40
60
80
100
120
140
160
0
4
8
12
16
20
24
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
U.S. Tobacco Exp (MM) Avg Price Per Pack
U.S. Smoking Rates
Traditional Tobacco Market Size
Source: Bloomberg, Frost & Sullivan
172 346 521724
1,9853,143
5,124
7,667
11,386
16,975
49%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2009 2010 2011 2012 2013 2014 2015 2016 2017 20180
2000
4000
6000
8000
10000
12000
14000
16000
18000
U.S. E-cigaret te Reta il Revenue (MM) Growth Rate
E-cigarette Over Cigarette
Better publicperception
Lower cost in thelong run
Less regulationse.g. indoor usage
More productdiversity
e.g. flavoring
Nicotine-lessproducts
Pending
RAI-LO
merger
53% 34%(26%)
(16%)11%
(3%) 2%
MO RAI' RAI LO ITYBY' ITYBY VGR
63%
91%
67%
2004-2009
2009-2014
2004-2014MO
U.S.
Others
Industry
M&A
dominated
by U.S.
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
8/13
11.6x
9.6x
23.5x
14.3x
EV/EBITDA LTM
P/E LTM
14.0x
19.6x
Comparable Companies Analysis Details
Precedent Transactions Analysis
Valuation
8
Other Assumptions
Share EBITDA Sales 2013 MktCompany price LTM FY1 LTM FYI margin growth cgt vol cap EV
Imperial 91.74 11.2x 11.2x 19.7x 13.9x 24.1% -6.1% 311B 44B 58B
Lorillard 63.14 11.8x 11.5x 19.6x 18.7x 42.3% 7.3% 40 23 25
Philip Morris 85.81 11.5x 12.0x 16.1x 16.9x 47.1% -0.5% 880 133 161
Reynolds American 65.20 13.0x 12.1x 11.6x 19.1x 39.3% -0.8% 64 35 39
Altria 49.10 14.0x 13.3x 19.6x 19.0x 47.0% 0.9% 129 97 108
High 14.3x 14.0x 23.5x 22.4x 47.1% 93.0% 880 133 161
Low 9.6x 9.4x 11.6x 13.9x 14.0% -6.1% 40 10 11
Average 12.2x 12.1x 18.3x 18.2x 36.0% 11.8% 311 54 62
Median 12.1x 12.1x 19.3x 18.8x 40.2% 1.5% 129 39 49
EV/EBITDA P/E Criterion: $10B EV
5 U.S.-listed companies5 companies listed elsewhere
Date EV/ Date EV/
announced Acquirer Target EV EBITDA announced Acquirer Target EV EBITDA
7/15/2014 Reynolds American Lorillard 26,477 13.0x 9/8/2008 Altria UST 11,613 12.0x
3/31/2014 Japan Tobacco JT Int'l 261 11.5x 7/31/2008 Philip Morris Int'l Rothmans 1,909 5.9x
10/13/2011 British American British American - Chile Op 450 8.5x 3/15/2007 Imperial Altadis 20,476 14.2x
9/8/2011 UBS AG Bentoel Internasional Investama 86 7.6x 1/19/2007 Altria Philip Morris Pakistan 335 13.3x
6/17/2009 British American Bentoel Internasional Investama 644 14.3x 1/19/2007 Altria Philip Morris Pakistan 66 13.4x
10/13/2008 Skandinavisk Skandinavisk Tobakskompagni 909 58.7x 12/15/2006 Japan Tobacco Gallaher 19,020 13.7x
EV/EBITDA: High 14.3x Low 7.6x Average 12.1x Median 13.1x
Source: Company filings, Bloomberg
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
9/13
Discounted Cash Flow Analysis WACC
Growth Assumptions
Valuation
9
Cost of debt 3.2%
Effective tax rate 35.0%
After-tax Cost of Debt 2.10%
Risk-free rate 2.3%
Beta 0.65Market return 9.4%
Cost of Equity 6.95%
Target D/E 0.15
WACC 6.31%
Other Assumptions
Final EBITDA 10,554
Exit EV/EBITDA 13.00x
Terminal value 137,205Discount factor 0.74
PV terminal value 101,041
Enterprise value 124,733
Net debt 11,755
Implied equity value 112,978
FD shares outstanding 1,976
Implied share price 57.16
(USD MM, fiscal year ending Dec 31) 2011A 2012A 2013A 2014 2015E 2016E 2017E 2018E 2019E
EBITDA 6,321 7,478 8,296 7,809 7,415 7,727 8,241 9,106 10,554
NOPAT 3,556 6,196 4,529 4,188 5,394 5,672 6,088 6,737 7,771
Plus: D&A 253 225 212 203 229 234 243 256 278
Less: Capex (105) (124) (131) (157) (139) (143) (148) (157) (172)
Less: Inc / (dec) in NWC (313) (1,714) 186 611 (524) 120 166 234 385
Less: Equity income from SABMiller (730) (1,224) (991) (1,004) (1,113) (1,234) (1,367) (1,516) (1,680)
Plus: Dividends from SABMiller 357 402 439 461 511 566 628 696 771
Unlevered FCF 3,018 3,761 4,244 4,302 4,358 5,216 5,608 6,251 7,354
Growth (%) 24.62% 12.84% 1.37% 1.31% 19.68% 7.52% 11.45% 17.65%
Discount factor 0.94 0.88 0.83 0.78 0.74
PV of FCF 4,099 4,615 4,668 4,894 5,416
-4%
-3%
-2%
-1%
0%
1%
2%
3%
0%
5%
10%
15%
20%
25%
30%
35%
BASE BULL BEAR
-15%
-10%
-5%
0%
5%
10%
15%
20%
Smokeable products E-cigarettes SABMiller
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
10/13
Sensitivity Analysis
Valuation
10
Valuation Summary
57.16 5.70% 6.00% 6.30% 6.60% 6.90% 7.20% 7.50% 57.16 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%
11.00x 50.78 50.04 49.32 48.61 47.91 47.22 46.55 -5.00% 40.96 44.98 49.00 53.02 57.05 61.07 65.09
12.00x 54.82 54.03 53.25 52.49 51.74 51.00 50.27 0.00% 40.99 45.01 49.03 53.06 57.08 61.10 65.12
13.00x 58.87 58.02 57.19 56.37 55.56 54.77 53.99 5.00% 41.02 45.05 49.07 53.09 57.11 61.14 65.16
14.00x 62.92 62.01 61.12 60.25 59.39 58.54 57.71 10.00% 41.06 45.09 49.11 53.13 57.15 61.18 65.20
15.00x 66.97 66.00 65.06 64.13 63.21 62.31 61.42 15.00% 41.11 45.13 49.15 53.18 57.20 61.22 65.24Exitmultiple
WACC E-cigarette 2019E market share
SABCAGR
20.00 25.00 30.00 35.00 40.00 45.00 50.00 55.00 60.00 65.00 70.00
DiscountedCash Flow
PrecedentTransactions
ComparableCompanies
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
11/13
Catalysts & Risks
11
Chaos on the International Stage Potential Oil Crisis Corporate Finance Transactions
Acquisition of e-cigarette companies
can speed up revenue growth in the
market
Market consolidation led by industry
M&A can combat shrinking
smokeable product market
Other corporate finance activities
Contingencies and Litigations Slow Market Growth
Damages claimed in some tobacco-
related litigations can range in thebillions of dollars
Unforeseen changes in regulations
can negatively impact Altrias future
revenue and net earnings
Other Unfavourable Factors
Potential adverse changes in tobacco
leaf price, availability and quality
Acquisitions fail to achieve expected
results
Faster than expected decline in the
smokeable product market
Expectation of rapid expansion of
the e-cigarette market fail to realize
Catalysts
Risks
Oil prices falls between $55 - 60
ISIS threatens political instability
within the Middle East, or global oil
production
Unexpected interest rate hikes in the
U.S.
Fall out between Russia and
European Union
European Unions monetary policies
fail to provided the stimulus needed
Slowing growth and negative
economic indicators in BRIC nations
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
12/13
Recommendation
12
Altria Group, Inc. (NYSE: MO)
BUY, target: $57.16, stop: $43.65
Market dominanceRecession-resistantindustry
Emerging e-cigarette
market
Strong financials and FCF
generation ability
-
8/10/2019 $MO (NYSE): BUY Nov 23, 2014
13/13
Appendix
13
Discounted Cash Flow Analysis
(USD MM, fiscal year ending December 31) 2008A 2009A 2010A 2011A 2012A 2013A CAGR 2014 2015E 2016E 2017E 2018E 2019E CAGR
Net revenues - traditional 19,356 23,556 24,363 23,800 24,618 24,466 0.95% 24,352 24,596 24,841 25,090 25,341 25,594 1.00%
% growth NA 21.70% 3.43% -2.31% 3.44% -0.62% ^2009 -0.47% 1. 00% 1. 00% 1. 00% 1. 00% 1. 00%
Net revenues - e-cigarettes - 205 613 1,366 2,716 5,061 122.92%
% growth NA 199.26% 122.76% 98.78% 86.36%
Cost of sales 7,990 7,704 7,680 7,937 7,206 7,732 7,905 8,114 8,433 8,943 9,772
Excise taxes on products 6,732 7,471 7,181 7,118 6,803 6,576 7,097 7,168 7,240 7,313 7,386Gross profit 8,834 9,188 8,939 9,563 10,457 4.31% 10,044 9,798 10,172 10,783 11,801 13,498 8.34%
% margin 37.50% 37.71% 37.56% 38.85% 42.74% 41.25% 39.51% 39.96% 40.76% 42.06% 44.03%
SG&A & others 3,081 2,684 2,618 2,085 2,161 2,235 2,383 2,446 2,542 2,695 2,944
EBITDA 5,753 6,504 6,321 7,478 8,296 9.58% 7,809 7,415 7,727 8,241 9,106 10,554 9.23%
% margin 24.42% 26.70% 26.56% 30.38% 33.91% 32.07% 29.90% 30.36% 31.15% 32.46% 34.43%
D&A 291 276 253 225 212 199 229 234 243 256 278
EBIT 5,462 6,228 6,068 7,253 8,084 10.30% 7,611 7,186 7,492 7,999 8,850 10,276 9.35%
% margin 23.19% 25.56% 25.50% 29.46% 33.04% 31.25% 28.97% 29.43% 30.23% 31.54% 33.52%
(+) Equity income from SABMiller (600) (628) (730) (1,224) (991) 13.37% (1,004) (1,113) (1,234) (1,368) (1,516) (1,680) 10.85%
% growth NA 4.67% 16.24% 67.67% -19.04% 1.31% 10.85% 10.85% 10.85% 10.85% 10.85%
Taxes 35.00% 2,905 3,054 3,278 3,628 4,185
NOPAT 5,394 5,672 6,088 6,738 7,772 9.56%
% growth NA 5.15% 7.33% 10.67% 15.35%Plus: D&A 229 234 243 256 278
Less: Capex (139) (143) (148) (157) (172)
Less: Inc / (dec) in NWC (524) 120 166 234 385
Less: Equity income from SABMiller (1,113) (1,234) (1,368) (1,516) (1,680)
Plus: Dividends from SABMiller 511 566 628 696 771
Unlevered FCF 4302 4,358 5,216 5,608 6,251 7,354
WACC 6.31% 4 Growth 1.31% 19.69% 7.52% 11.45% 17.65%
Discount period 1 2 3 4 5
Discount factor 0.94 0.88 0.83 0.78 0.74
PV of FCF 4,099 4,615 4,668 4,894 5,416
Enterprise value Implied perpetuity growth rate Implied equity value and share price
Cumulative PV of FCF 23,692 Terminal year FCF (2019E) 7,354 Enterprice value 124,733
WACC 6.31% Less: Total debt (13,993)
Terminal value Terminal value 101,041 Less: Preferred shares -
Terminal year EBITDA (2019E) 10,554 Implied perpetuity growth rate -0.90% Less: Noncontrolling interest (3)
Exit Multiple (EV/EBITDA) 13.00x 4 Plus: Cash and cash equivalents 2,241 Net debt 11,755
Terminal value 137,205
Discount factor 0.74 Nov 19, 2014 closing price ($) 49.10 Implied equity value 112,978
PV of terminal value 101,041 Implied share price ($) 57.16 Outstanding shares 1,976
% of enterprise value 81.01% Implied growth (%) 16.42% Implied share price ($) 57.16
Implied PE 19.13x
Enterprise value 124,733