How to Get Altria's Stock Rising Again

ALTRIA GROUP IS VIEWED AS ONE OF THE country's most fearsome companies because of its willingness to use its political clout and legal muscle to maintain the dominance of its domestic cigarette brands.

Known on Wall Street as Big MO -- a reference to its ticker symbol (MO), which harks back to its prior identity as Philip Morris and to its lengthy record of strong shareholder returns -- Altria lately has done little for investors. The Street is concerned that the company overpaid early this year for smokeless-tobacco maker UST, and that Marlboro, its top seller and the No. 1 cigarette in America, is losing some of its appeal among smokers. Its market share among smokers aged 18 to 25, a key demographic, was 48% in 2007, down from 57% in 1999.

At around 18.50, Altria has one of the lowest price/earnings ratios in the global cigarette industry. It also has one of the highest dividend yields: 7.3%. The stock trades for 10.6 times projected 2009 profits of $1.77 a share and 10 times estimated 2010 earnings of $1.87. Even Reynolds American (RAI), with weaker brands, sports a slightly higher P/E on a 2010 basis.

At its current price, Altria's stock appears to have little downside and significant appreciation potential. One of the company's prime assets is a 27% stake in international brewer SABMiller (SAB.U.K.), which is worth $11.5 billion, or 30% of Altria's current market value.

Altria has lost some cachet in the investment community since the 2008 separation of its international tobacco operations. The faster-growing spinoff, Philip Morris International (PM), trades around 49, or for 15 times projected 2009 profits, a sizable premium to Altria.

In a recent report to clients, David Adelman, the veteran tobacco analyst at Morgan Stanley, offered a three-part prescription to get Altria's stock rising again: more aggressive product pricing, greater cost cuts and a resumption of the company's stock-repurchase program.

"Unlike most tobacco companies, Altria's 'bull case' is almost entirely within its control," Adelman wrote. "We believe that a different corporate strategy could have a profoundly favorable impact on shareholder value." If Altria follows his script, its share price could hit 27, he said. Yet he carries an Equal Weight rating on the stock, reflecting doubts as to whether the insular company will change.

Marlboro, reportedly President Obama's brand of choice, is a powerhouse, with a 42% market share, four times that of Lorillard's (LO) Newport, the No. 2 brand. Philip Morris USA's total market share in cigarettes is 50%. Despite its size, Altria has higher costs and lower profitability per pack than the thrifty Lorillard, which spends relatively little to support sales of its Newport brand.

Adelman argues that Altria could lift its annual profit growth by three to four percentage points if it followed his plan. He speculates it may be "putting a ceiling on its profitability" by focusing on expanding Marlboro's market share, which has expanded steadily in the past 20 years. Yet profits at the company's Philip Morris USA unit were no higher last year than in 1992.

Altria says it has achieved almost $900 million of cost savings relative to its 2006 base. It aims to hit $1.5 billion in savings by 2011. "We're delivering shareholder value and maintaining a cost-reduction program that is on schedule in one of the most challenging environments the company has faced," a spokesman says. He notes that Altria lifted its dividend by 6% in August, the 42nd increase in 40 years. Altria aims for a dividend-payout ratio of about 75%.