We upgrade Altria Group, Inc. (MO) to Hold from Sell, since despite a number of outstanding lawsuits, recent court rulings have been largely favorable, including some adverse verdicts being overturned in the tobacco industry's favor. The management believes that Altria can enhance profitability and shareholder value with greater focus on the domestic tobacco market alone, where the company has a leading market share.
The U.S. tobacco industry is one of the largest and most profitable markets in the world. With a number of strong brands, an efficient distribution network, and a strong field-sales force, Altria has the ability to leverage the company's resources across an array of tobacco products. However, positive and negative legal headlines create volatility in the stock. Product liability risks exist in the industry and may never be eliminated completely. Losses in litigations and potential mega-awards against tobacco companies would not only have a material effect on earnings, but could even threaten the solvency of the company.
Altria has traded in a P/E multiple ranges of 6 to 18 over the last 10 years. It has maintained a low P/E due to tobacco-related litigation issues, and has been pressured down to a single-digit P/E during times of unfavorable court verdicts. We expect Altria to trade in a P/E multiple range of 12 to 16. The target price of $24 is 14.5 times our six-month forward earnings estimate.
Read the full analyst report on MO
Get real-time market insights and profitable stock recommendations from the team of analysts at Zacks Equity Research. See all todays Analyst Blog entries on Zacks.com.