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Altria: Despite Concerns, Share Underperformance Merits an Upgrade, Says Morgan Stanley
Stock Analysis & Ideas

Altria: Despite Concerns, Share Underperformance Merits an Upgrade, Says Morgan Stanley

Last week, the FDA issued marketing denial orders (MDOs) for JUUL’s products, effectively ordering the company to take its offerings off the shelves.

The regulatory body claims there is not enough evidence to suggest that the “toxicological profile” of the products are up to the appropriate public health standards.

Following the initial announcement of the FDA’s intentions, shares of Altria (MO) hit the skids and shed 9% in the subsequent session. The tobacco giant acquired a 35% stake in Juul in 2018, and is considered a vital part of Altria’s reduced-risk product portfolio.

Even prior to the news, MO shares were on the backfoot, and considering the recent display, Morgan Stanley’s Pamela Kaufman thinks some adjustments to her MO model are required.

Explaining her stance, Kaufman wrote, “We remain cautious on MO’s fundamentals and long-term structural positioning, but given the stock’s recent underperformance, with the shares down –(19.97% in June to date vs. the S&P 500 -5.73% and Consumer Staples -1.96%) and valuation contracting from 8.6x to 7.3x NTM EV/EBITDA (11% below MO’s 3year average), we believe the market is more appropriately pricing in our concerns.”

The result is an upgrade to MO’s rating – boosted from Underweight (i.e., Sell) to Equal-weight (i.e., Neutral).

It should be noted, however, that following the denial of JUUL’s premarket tobacco product applications (PMTAs), Kaufman has also removed JUUL from her “base case” price target, while also noting the need for increased investment in Altria’s RRPs (reduced risk products).

And while the risk-reward might appear more “balanced” following the share price decline, Kaufman believes there is “greater long-term risk around MO’s growth outlook.”

As such, accompanying the new rating is a $43 price target (compared to the prior $47) which suggests shares are currently trading according to their fair value. (To watch Kaufman’s track record, click here)

What does the rest of the Street make of Altria’s prospects? Rating wise, most agree with Kaufman; 7 analysts join her on the sidelines, although with 4 additional Buys, the stock manages a Moderate Buy consensus rating. In contrast to the MS analyst, most appear to think the shares are undervalued; going by the $54.25 average target, the stock is expected to climb ~27% higher over the one-year timeframe. (See Altria stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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