Q1 Beat

Altria's (MO) Q1 ticked all the right boxes and delivered a robust beat across volumes, revenue, and earnings front. Reported Adjusted Diluted EPS was at $1.09 jumped 18.5% vs $0.92 in the previous quarter for the corresponding period and surpassing the consensus expectations of $0.99 primarily driven by shipping gains. Q1 2020 shipment volumes smashed through even the most optimistic projections delivering a 6% growth compared to a consensus expectation of degrowth of 2%. Any volume growth is rare for Altria where we have witnessed a continuous decline in volumes over the years. The growth was also due to large destocking in Q1 2019 causing a base effect with distributors stocking up in the current quarter ahead of the lockdown measures implemented by the government. The company said adjusting as per the traditional measures, volumes decreased 3.5%, however even that is supported by the pantry loading. Excluding even the pantry loading effects, the shipment volumes for smokeable products declined 5% compared to an industry volume decline of 3.5%.

Smokeable Products Segment

Revenues jumped 16% in the quarter gone by compared to the corresponding period in the previous year driven by larger shipment volume and higher pricing. Adjusted OCI improved 22% in the quarter due to higher volumes as well as better pricing power. Altria's market share, however, declined to 49.2%, a sequential drop of 30 bps and 70 bps from the year-ago period. The company said the drop in market share was as a result of old vaporers turning to cigarettes following the ban on flavored vape products and these people chose deep discounted products leading to higher industry volumes and an increase in discount market share.

Guidance Withdrawn Amid Weak Outlook

Altria withdrew its guidance, which was albeit a bit surprising, as MO always positioned itself as a stable cashflow-generating machine indifferent to economic downturns. The company said it has little visibility of the EPS contribution from ABI, which is understandable given ABI withdrew its guidance. However, the company is expecting some fluctuations in its core tobacco business and expects some further downtrading which calls for a skeptical look at the company's prospects. MO also highlighted a weaker outlook expecting a shipment volume degrowth in the range of 4 to 6% for the year.

Valuation Summary

MO trades at a multi-year low NTM P/E multiple of ~8x compared to the 10-year median of 14x and 3-year median of ~13x. Although the company's business changed due to vapes making inroads in the world's leading cigarette maker's core business, the company still deserves to trade at a higher multiple. On the back of envelope calculations, using a 10x multiple on NTM earnings, the company's fair value should likely be around $45 per share and in line with the previous reports. At the current levels, all the negatives seem to be priced-in in the stock, and the only way forward is looking up. REITERATE BUY.