Horngren’s Cost Accounting A Managerial Emphasis, Canadian 9th edition soluti...
Finance Presentation on Altria Group
1. Altria
Group,
Inc.
–
Update
Group 5: Michelle Darmawan
Zhang Chenxi
Manasvi Garg
Archit Ajit Sharma
Ho Qian Ying Adeline
2. Disclaimer
This study is purely for academic purposes. All
investments are subject to market risk. Please
read the report carefully before investing. The
group shall not be held responsible for any loss
made by following the recommendations made in
the following sections.
3. ALTRIA – The Company
• Introduction
• Industry Overview
• SWOT Analysis
• Financial Ratios
• Long Term Financing Structure
• Stock Analysis
• RECOMMENDATIONS
4. Subsidiaries
1. Phillip Morris USA Inc.
2. U.S. Smokeless Tobacco Company
3. Ste. Michelle Wine Estates Ltd
4. John Middleton Co.
5. Phillip Morris Capital Corporation
5. Business Segment Overview
1. Cigarettes
2. Cigars
3. Smokeless Products
4. Wine Products
5. Phillip Morris
Capital Corporation
6. Net Revenue Breakdown by Business
Segment
2% 4%
3%
Cigarettes
6%
Cigars
Smokeless Products
Wine Products
85%
Phillip Morris Capital
Corporation
9. 3. Highly susceptible to litigation
• Insurance program reauthorization act of 2009 drastically increased
taxes on tobacco products to provide funding for governmentsponsored health insurance for illegal aliens and low-income families
4. New opportunities for growth
e.g. smokeless products and wine
10. Major Players & Competitors
1. Reynolds American, Inc. (RAI)
2. British American Tobacco PLC. (BTI)
12. SWOT Analysis
STRENGTHS
WEAKNESS
1. Largest Tobacco Manufacturer
2. Company is well established
3. Company stock is generally not
volatile, with a beta ratio of only
0.43
1. Declining smoking rates
2. Cigarettes are the only driving
force in company
3. High competition
OPPORTUNITIES
THREATS
1. Acquisitions can be extremely
profitable
2. Smokeless products proved to be
growing trend in consumers.
1. Illegal brands can compromise
market share
2. High taxes can threaten growth
3. Social pressures discourages
smoking.
22. Capital Structure
Long-term
Total Debt to Total Debt to
Debt to
Equity
Assets
Equity
12,419 / 3,168 = 32,161 / 3,168 = 32,161 / 35,329
3.9201
10.1518
= 0.9103
Debt > Equity
23. Cost of Capital
g = 2%
D1 =1.880
Cost of
Equity =
7.98%
P0 = 31.44
Cost of
Debt =
6.7%
24. Cost of Capital Cost of Capital (WACC)
Weighted Average
wdrd(1-T) + wprp + wsrs
(0.9103)(0.067)(1-0.296) + (0.0897)(0.0798)
= 0.04293 + 0.00715806
= 5.009%
Low WACC
Good
investment
27. Investment Risks
• Premium Brand Sale Decline
• Adverse Litigation and Legal Issues
• Decrease in Consumer Demand
▫ Public awareness of health risks associated with
smoking
▫ Social acceptability of smoking
• Government Regulation
▫ Cigarette taxes
▫ Restriction on Smoking
28. Quantifying Risk
• Capital Asset Pricing Model (CAPM):
▫ Risk free rate: Rf = 2.04 (10yr US Treasury Bond Yield)
▫ Cost of Equity/Return: Rs = 1.880/31.44 + 0.02 = 7.98%
β: 7.98=2.04+β (RM-RF) where Rf =2.04 and Rm = 16.40
β =0.41
30. Dividend Growth Model
Terminal growth rate = 2%
Steady State – Year 6 onwards
$35.85: Undervalued by 14.03% taking $31.44 as current stock price
31. Multiples of Other Firms
• Lorillard
Altria EPS x Lorillard PER
2.21 x 13.84
$30.59
• Reynolds American
Altria EPS x RAI PER
2.21x 18.50
$40.89
Average Stock Price: $ 35.74
34. Results
• Stock price of the Altria group is very sensitive
to changes
• Terminal growth rate of 2% roughly matches the
forecasted growth of the US economy
– Altria stock price should remain stable
36. RECOMMENDATIONS
Consistently strong performer
Undervalued according to both
methods
Commanding industry position
Regular dividend payouts
Unlikelihood that any new tobacco
rivals will emerge
No. 1 in the sales in the US tobacco
market
BUY for the Altria Group, Inc.’s stock in
the short term.
37. RECOMMENDATIONS
Uncertainty surrounding the tobacco
industry
Low terminal growth rate of 2%
Highly sensitive to the terminal growth
rate
Cigarette sales constitute a massive 85%
share of Altria’s sales revenue
Growing inclination of consumers towards
smoke-free cigarette substitutes and
smokeless products
HOLD in the long term