Altria (NYSE: MO) saw its stock price plummet by almost 40% over the last 3 years, from $74 in February 2017 to about $45 in February 2020. This drop was primarily driven by a complete washout of profitability in 2019, with the company reporting losses in 2019, led by a surge in impairment charges. This was partly offset by a rise in the price-to-earnings (P/E) multiple, with the company entering into the e-cigarette market with a 35% investment in JUUL, which is set to diversify its portfolio which was earlier restricted to cigarettes and chewable tobacco. We break down the movement in Altria’s stock price into four factors: growth in revenue, drop in net income margin, reduction in share count, and expansion of P/E multiple.

A] Revenue Growth

• Altria has seen only a modest rise of $0.5 billion in revenues over the last three years, with net revenue growing from $19.3 billion in 2016 to $19.8 billion in 2019.
• However, growth is likely to accelerate to $20.2 billion in 2020, led by higher revenue from heated tobacco products, benefiting from JUUL and Cronos acquisitions, partly offset by a drop in cigarette sales.
• Revenue from smokeable products segment is expected to remain under pressure going forward, mainly due to lower shipments, partially offset by higher pricing.
• Cigarette volumes have also been decreasing over recent years as people are moving away from combustible products.
• However, Altria has resorted to price increases to avoid a sharp decline in revenue.
• Revenue from the smokeless products division is expected to increase in the near future, driven by higher volume, along with premium pricing and partial phasing out of promotional investments and discounts.
• Continuously increasing market share of Copenhagen, which is the premier offering in the oral tobacco category, is also expected to boost segment revenues.

B] Net Income Drop

• Net income decreased from $14.2 billion in 2016 to -$1.3 billion in 2019
• Net income margin reached a high of 55.3% in 2016 (due to gain from business combination of ABInBev and SABMiller), it has continuously dropped to historical level of 27.5% in 2018.
• However, margin crashed to -5.1% in 2019, as the company recorded an impairment charge of over $10 billion, due to decrease in value of its investment in JUUL and Cronos.
• The FDA crackdown on e-cigarettes and many states in the US banning flavored e-cigarettes is expected to hit JUUL the hardest, which has led to the value of Altria’s investment in JUUL dropping by about $8.6 billion in a year.
• Total expenses as a % of revenue has continuously increased with the rise being sharp in 2019.
• Notable changes can be seen in effective tax rate and impairment, partially offset by steady decline in cost of sales, SG&A, and excise as a % of revenue.

C] Drop In EPS

• EPS has declined steadily over the years from $7.29 in 2016 to -$0.69 in 2019.
• EPS crashed in 2019 due to a sharp drop in net income as explained above.
• Number of shares outstanding have remained almost stable.

D] Expansion of P/E Multiple

• Altria’s P/E multiple expanded from 25.5x in December 2016 to 45x in December 2019.
• This compares with Philip Morris which saw its P/E drop from 21.9x to 17.9x during the same period.
• P/E multiple expansion has mainly been driven by significant drop in earnings on the back of slide in margins. Additionally, the drop in stock price was less compared to decrease in EPS, as markets have been positive about Altria’s entry into the e-cigarette market with 35% investment in JUUL, which is set to diversify its portfolio which was earlier restricted to cigarettes and chewable tobacco.

Though we have seen a 40% drop in stock price in the last 3 years, Trefis has a price estimate of $57 per share for Altria’s stock.