Altria Group Inc (MO) 3Q09 Volumes Disappoint, but We Expect EPS to Remain Decent 3Q09 EPS beat consensus due to tax — Adjusted EPS was $0.48, 1¢ above Citi and 2¢ above consensus. This beat was entirely due to a lower tax rate. Volume declines raise new questions — Most disappointing, PM USA volumes were 9% below our forecasts. Management says this mainly reflected stocking issues, as retail market share trends were OK. Although few investors are taking anything on trust now, we think volume trends will look better in 2010. PM USA pricing and margins were significantly stronger than forecast — The weak volumes were offset by strong pricing and margin gains, demonstrating that the industry is exercising enough pricing discipline to ensure EPS growth. We are confident this will continue, even though PM USA's market share is likely to remain under pressure. We think the market is spending too much time worrying about smokeless — In retrospect it is clear MO has destroyed value with the UST acquisition and financing, but this is in price now. Smokeless is likely to contribute only 10% of EBIT next year. By contrast SABMiller, arguably the best managed brewer globally, with 85% of EBIT coming from emerging markets, is likely to contribute 9% of MO's EBIT. Stock remains cheap even though we can't see a catalyst — We retain our Buy on the stock mainly on valuation grounds. MO is on a prospective dividend yield of 7.5% while 10-year Treasuries yield 3.4%, despite the fact that MO's earnings are protected from inflation by its pricing power. MO is now on a lower P/E than Reynolds. EPS Q1 Q2
Great stock and good analysis. This stock will run forever. I think people often forget the power of compounding dividends and the power that has over time. I am more excited about dividend increases year after year than the share price.