MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY...

29
Applied Portfolio Management Analysts: Alexander Anguiano, Travis Hirt, Arek Kozaczuk and Bryan Lunzmann Report Date: 5/8/2015 Market Cap (mm) $97,456 Annual Dividend $2.00 2Yr Beta (S&P 500 Index) 0.74 Return on Capital 95.6% Dividend Yield 4.1% Annualized Alpha 26.6% Compared With: EPS (ttm) $2.56 Price/Earnings (ttm) 19.3 Institutional Ownership 8.5% Philip Morris International, Inc. Current Price $49.27 Economic ValueAdded (ttm) $4,801 Short Interest (% of Shares) 0.7% Reynolds American Inc. 12mo. Target Price $58.00 Free Cash Flow Margin 25.1% Days to Cover Short 1.8 and the S&P 500 Index Business Description Total Revenue 2.6% Free Cash Flow 17.5% EBIT 5.7% Total Invested Capital 1.2% NOPAT 8.2% Total Assets 2.1% Earnings Per Share 16.0% Economic ValueAdded 8.7% Dividends Per Share 8.2% Market ValueAdded 18.0% 2010 2011 2012 2013 2014 39.2% 40.1% 43.0% 47.3% 43.8% 15.4% 20.9% 21.5% 24.0% 25.1% 7.6% 5.5% 6.5% 5.9% 5.2% 5.9% 5.3% 5.4% 4.8% 4.1% 2010 2011 2012 2013 2014 1.87 1.64 2.06 2.26 2.56 1.46 1.58 1.70 1.84 2.00 2.18 1.96 2.40 2.73 2.59 1.94 1.43 2.66 2.55 2.42 Datasource: Capital IQ Altria Group Inc. Sector: Consumer Staples BUY MO Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally. It offers cigarettes primarily under the Marlboro brand; cigars principally under the Black & Mild brand; and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, Husky, and Marlboro Snus brand names. The company also produces and sells blended table wines under the Chateau Ste. Michelle, Columbia Crest, and 14 Hands names; and imports and markets Antinori and Villa Maria Estate wines, as well as Champagne Nicolas Feuillatte in the United Investment Thesis ANNUALIZED 3YEAR CAGR Altria is the largest player in the U.S. tobacco market, with about 50% share. Altria is well positioned to maintain current revenue levels on cigarettes, despite sales volumes decreasing, due to their ability to raise prices, and thus increase margins. Altria is pursuing diversification into growth markets through organic growth in the ECig market, acquisition of high quality wine brands, and their stake in SABMiller. Altria’s annualized dividend payout ratio for 2014 was 80.9%, which was the highest in the S&P Food, Beverage & Tobacco Index. Given our outlook on the macroeconomy, we expect a transition into consumer staple stocks like Altria, to reflect the safety in their low beta and high dividend yield. Margins and Yields Operating Margin Per Share Metrics Earnings NOPAT Free Cash Flow Dividends Free Cash Flow Margin Earnings Yield Dividend Yield 10% 0% 10% 20% 30% 40% 50% 60% MO ^SPX 10% 0% 10% 20% 30% 40% 50% 60% MO PM RAI 0 5 10 15 20 25 2009 2010 2011 2012 2013 2014 Price/Earnings Price/Free Cash Flow $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 2009 2010 2011 2012 2013 2014 EBIT Net Operating Profit After Tax $0 $20,000 $40,000 $60,000 $80,000 $100,000 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 2009 2010 2011 2012 2013 2014 Economic ValueAdded Market ValuedAdded 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 2009 2010 2011 2012 2013 2014 ROA ROE ROIC

Transcript of MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY...

Page 1: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

AppliedPortfolioManagementAnalysts:AlexanderAnguiano,TravisHirt,

ArekKozaczukandBryanLunzmann

Report Date: 5/8/2015

Market Cap (mm) $97,456 Annual Dividend $2.00 2‐Yr Beta (S&P 500 Index) 0.74

Return on Capital 95.6% Dividend Yield 4.1% Annualized Alpha 26.6% Compared With:

EPS (ttm) $2.56 Price/Earnings (ttm) 19.3 Institutional Ownership 8.5% Philip Morris International, Inc.

Current Price $49.27 Economic Value‐Added (ttm) $4,801 Short Interest (% of Shares) 0.7% Reynolds American Inc.

12‐mo. Target Price $58.00 Free Cash Flow Margin 25.1% Days to Cover Short 1.8 and the S&P 500 Index

Business Description

Total Revenue 2.6% Free Cash Flow 17.5%

EBIT 5.7% Total Invested Capital 1.2%

NOPAT 8.2% Total Assets ‐2.1%

Earnings Per Share 16.0% Economic Value‐Added 8.7%

Dividends Per Share 8.2% Market Value‐Added 18.0%

2010 2011 2012 2013 2014

39.2% 40.1% 43.0% 47.3% 43.8%

15.4% 20.9% 21.5% 24.0% 25.1%

7.6% 5.5% 6.5% 5.9% 5.2%5.9% 5.3% 5.4% 4.8% 4.1%

2010 2011 2012 2013 2014

1.87 1.64 2.06 2.26 2.56

1.46 1.58 1.70 1.84 2.00

2.18 1.96 2.40 2.73 2.591.94 1.43 2.66 2.55 2.42

Datasource: Capital IQ

Altria Group Inc. Sector: Consumer Staples BUYMO

Altria Group, Inc., through its subsidiaries, manufactures and sells 

cigarettes, smokeless products, and wine in the United States and 

internationally. It offers cigarettes primarily under the Marlboro brand; 

cigars principally under the Black & Mild brand; and moist smokeless 

tobacco products under the Copenhagen, Skoal, Red Seal, Husky, and 

Marlboro Snus brand names. The company also produces and sells 

blended table wines under the Chateau Ste. Michelle, Columbia Crest, 

and 14 Hands names; and imports and markets Antinori and Villa Maria 

Estate wines, as well as Champagne Nicolas Feuillatte in the United 

Investment Thesis

ANNUALIZED 3‐YEAR CAGR

Altria is the largest player in the U.S. tobacco market, with about 50% 

share. Altria is well positioned to maintain current revenue levels on 

cigarettes, despite sales volumes decreasing, due to their ability to 

raise prices, and thus increase margins. Altria is pursuing diversification 

into growth markets through organic growth in the E‐Cig market, 

acquisition of high quality wine brands, and their stake in SABMiller. 

Altria’s annualized dividend payout ratio for 2014 was 80.9%, which 

was the highest in the S&P Food, Beverage & Tobacco Index. Given our 

outlook on the macro‐economy, we expect a transition into consumer 

staple stocks like Altria, to reflect the safety in their low beta and high 

dividend yield.

Margins and Yields

Operating Margin

Per Share Metrics

Earnings

NOPATFree Cash Flow

Dividends

Free Cash Flow Margin

Earnings YieldDividend Yield

‐10%

0%

10%

20%

30%

40%

50%

60%MO ^SPX

‐10%

0%

10%

20%

30%

40%

50%

60%MO PM RAI

0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

Price/Earnings Price/Free Cash Flow

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

2009 2010 2011 2012 2013 2014

EBIT Net Operating Profit After Tax

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2009 2010 2011 2012 2013 2014

Economic Value‐Added Market Valued‐Added

0%20%40%60%80%

100%120%140%160%180%

2009 2010 2011 2012 2013 2014

ROA ROE ROIC

Page 2: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

• Altria Group, Inc. was founded in 1919 and is headquartered in Richmond, Virginia. (9,000 employees) • MO manufactures and sells cigarettes, smokeless products, and wine in the United States. • In addition, MO retains almost 27% economic and voting interest in SABMiller, the world’s second-

largest brewing company.

• Tobacco represents 86.5% of total revenues for Altria. Although we anticipate volume sales contracting, we see Altria having the ability to raise prices, and thus margins.

• Smokeless products represent 9.3% of total revenues. This segment includes brands such as Copenhagen and Skoal, which own roughly 50% market share in the smokeless tobacco market.

• Altria has further diversified its company with the acquisition of popular wine brands, along with their interest in SABMiller.

Historical Performance

• The graph above shows 1-year returns of Altria, Reynolds American, and the S&P 500. • As we can see, Altria slightly outperformed its closest competitor, Reynolds American.

Page 3: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 • They significantly outpaced the S&P 500 by over 22%.

• As we see in the 3-year CAGR, Altria’s NOPAT is growing faster than EBIT which grows faster than revenues, indicating operating and tax efficiencies. Altria is growing dividends per share at 8.2% but their EPS is growing almost twice as fast, signifying a very profitable company. Altria has been growing its FCF’s at a healthy rate of 17.5%. We can see that Altria is creating value, with EVA growing at 8.7%.

Net Income, EPS & DPS

• Net Income is growing faster than total revenue. Comparing their 3-year CAGR’s, total revenue has grown 2.6% & net income has grown 14.4%. We can see that as we move down the Income Statement, Altria is gaining bottom line efficiency.

• We can see that Altria has steadily grown earnings and dividends per share, expanding EPS from $1.55 in 2009 to $2.56 in 2014 and dividends per share from $1.32 to $2.00 over the same time period. This reinforces our view that Altria has become more profitable over the last five years.

Page 4: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015

Profit Margins

• We can see Altria’s operating profit margin expanding every year except 2014. • From 2009 to 2014, we see Altria’s net profit margin expanding from 19.1% to 28.3% and free cash

flow margin expanding from 18.8% to 25.1%. This indicates that the company’s accounting profits are supported by tangible FCF’s.

Dividend Yield

• Altria’s dividend yield has outpaced Phillip Morris Intl. every year except 2014. • Dividend Exclusion: Corporations such as Altria can exclude 70% of dividend income from taxation.

Profitability: ROA, ROE & ROIC

• Altria’s ROA has increased from 8.7-14.7%, which shows that management is efficiently using assets to generate earnings. There ROE has increased from 78.1% in 2009 to 166.5% in 2014. Again, this is due to Altria using more debt than equity as a source of capital.

Page 5: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 • What’s important is that Altria has very high ROIC of 95.6% in 2014 & hold a distinct advantage over

there closest competitor, Phillip Morris Intl.

Liquidity & Debt

• Altria’s current ratio fluctuates between 1.08 and 1.53 and there quick ratio, which excludes inventory, ranges between 0.84 and 1.27. We would like to reinforce that this is a mature large-cap company which can easily borrow money, so the quick ratio being slightly below one should not be cause for concern at this point.

• Altria long-term debt to equity has grown from 272.5% to 449.7% over the last 6 years. It shows that Altria is financing more with debt, instead of equity. This is somewhat concerning and should be monitored.

• Our increasing debt levels raise concern, however Moody’s gives Altria a “Good Credit Grade”. Again, we will continue to monitor our long-term debt obligations.

Page 6: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015

Altman Probability & Piotroski Scorecard

• The Altman Z-Score formula gauges a company’s probability of bankruptcy. An Altman score greater than 2.9 is considered safe, scores between 1.23 & 2.9 are in a cautious “grey zone”; and scores below 1.23 are considered an outright warning of financial distress. As we can see from the exhibit, Altria scores well within the safe zone every year.

• The Piotroski Financial Fitness Scorecard is also used as a quick check on a firm’s financial soundness or safety. Altria’s historical Piotroski scores are strong, reaffirming our stance that they are not in danger of default.

Tobacco Brands

Altria’s competitive advantage

The subsidiary of Altria, Philip Morris U.S.A., was the largest manufacturer of U.S. tobacco with 2013 shipments totaling 129.3 billion units. Altria has a very large total market capitalization at $98 billion. This allows them a lot of flexibility with regards to debt accumulation, asset allocation, and large cash generation.

Page 7: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015

Altria is the dominate player in the overall U.S. tobacco market with over 50.6% total market share. The company had a commanding share of 46.7% of U.S. cigarette unit sales in 2013.

Iconic brands

Altria owns some of the most iconic tobacco brands of all time. These include Marlboro, Virginia Slims, Skoal, Copenhagen, and Black & Mild. Marlboro controls more than 40% of the U.S. Cigarette market (the largest in the U.S.). (Source CDC) While its Copenhagen and Skoal brands control roughly 50% of the smokeless tobacco market. (Source Seeking Alpha)

Page 8: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015

The amount of smokeless tobacco sold in the U.S. has been increasing since 1999. Manufacturers in 2011, sold approximately 122.7 million pounds of smokeless tobacco, this generated almost $2.94 billion in sales for 2011. (Source legacyforhealth.org)

Marlboro’s brand equity

The Marlboro brand alone has sold more cigarettes in the U.S. than the next 9 brands combined. Marlboro has been the bestselling cigarette brand in the U.S. for the last 43 years since 1972. Forbes ranks Marlboro #30 on “World’s Most Valuable Brands” list with market equity value of $17.4 billion and sales of $23.2 billion as of November 2014. (Source Forbes)

Page 9: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 Location of Tobacco production in the U.S.

U.S. tobacco production (for cigarettes) is regionally concentrated in Virginia, West Virginia, Kentucky, Tennessee, and North Carolina down to Florida. (Source CDC)

From the 10-K, Altria recognizes this risk and has expressed some concern that a man made or natural disaster (fungus, disease, drought, Hurricane etc.) could affect their subsidiaries ability to manufacture and process the necessary components of Altria’s tobacco products. (Source 10-K)

While these events present a concern, Altria views these risks as exceedingly rare and Altria is prepared to use alternate suppliers if necessary. (Source 10-K) The following chart as of April 21, 2015 shows that the Flue Cured and Light Air Cured tobacco regions are not under any immediate threat of drought.

Tobacco Demographics

Page 10: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 This map shows the percentage of the adult population who currently smoke cigarettes. They are located primarily in Appalachia and the Mississippi river valley, conveniently near the major national tobacco crops previously displayed. This has a positive effect on operating efficiency, as it lowers transportation costs.

While there is obviously strong regionality in tobacco use, there is also prevalent nationwide use of the product, meaning that the decisions of individual state legislatures won’t have any hugely disproportionate effects on sales.

91% of all smokers are more than a decade away from the average American life expectancy of 78.74 years. This tells us that Altria’s sales are not in danger of significant decline, as their consumer base is not in danger of disappearing due to natural causes.

This graph shows the percentage of Americans who are current smokers, and therefore, potential Altria customers, in dark green. Although there has been an obvious secular downtrend in the long run, notice that in the short term, it is trending much more sideways, as there has been only a very marginal decline in the last decade. We gather from this that the claims of a rapidly declining customer base have been exaggerated. We can likely rely on current smokers as a percentage of the total population, and thus Altria’s customer base being relatively stable going forward.

Page 11: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015

This chart shows a clear trend away from smokers being inclined to quit. The percentage of regretful smokers has fallen 11% from 2012 to 2014 and is at its lowest point in at least a decade. This means we can expect a higher retention rate for Altria’s current customer base.

This chart shows that a very high level of smokers feel that they’re smoking habits are unaffected by smoking bans in public places. Smoking Bans are already in place in 45 of the 60 most populous metropolitan areas in the country and 82% of Americans live under a ban on smoking in most or all public places. Given that the effects of these bans have already been felt by most of Altria’s customers, and that this chart shows a decline in their effects on sales, we feel that public smoking bans do not pose a significant threat to Altria going forward.

This chart shows that a similarly high portion of smokers feel that they’re smoking habits are unaffected by tax hikes on tobacco. While increased taxation certainly poses a potential threat to both margins and sales volume, based on this chart, we see that majority of Altria’s

potential customers have not allowed past tax hikes to change their smoking habits. We can conclude based on this that the effects of potential changes to tax policy will have a relatively minor effect on Altria’s sales volume.

Page 12: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015

To offset the long-term declines seen in cigarette consumption over the last thirty years, cigarette companies like Altria have been steadily increasing the price of their cigarettes. The price of cigarettes has more than tripled since 1982.

This graph shows that, despite declining sales volumes, Altria has been able to increase prices and thus margins, to balance total revenue.

Social Responsibility

Altria is committed to social responsibility; the company has invested in positive youth development through their Success 360° program. The program helps organizations better support middle school kids' academic achievements and healthy development through collaboration in and out of the classroom. Success360° partners include national and local youth-serving organizations such as Communities in Schools, Boys & Girls Clubs, Big Brothers Big Sisters, and 4-H. In 2014, Altria and its subsidiaries provided a combined $21.4 million for the Success360° initiative.

Altria and its operating companies' have also invested in environmental support organizations that focus on water quality, conservation, sustainable agriculture, litter prevention, and cleanup. To address water-quality issues, Altria partnered with the National Fish and Wildlife Foundation and its Western Water Program. In addition, Altria joined with the Alliance for the Chesapeake Bay to plant trees to reduce the amount of pollutants entering the Chesapeake Bay watershed and to capture greenhouse gases. Altria and its companies’ 2014 Environmental Contributions totaled $3.4 million.

Page 13: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 Tobacco’s Tax Generation

Over the last 100 years, taxes on cigarettes have been increasing. In 2014 the current federal excise tax on cigarettes is $1.01 per pack, this generated roughly $17 billion in Federal tax revenue, while states and local governments collected roughly 13 billion in revenue.

The federal tax money goes to fund the expansion of the State Children’s Health Insurance Program (SCHIP). The program provides funding to states for health insurance for families that do not qualify for Medicare, but are in lower income brackets. E-Cigarette sales in the U.S. were at $635 million in 2011 and jumped to $2.7 billion in 2014. The three year CAGR between 2011 and 2014 was 61.6%.

Page 14: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 E-cig Market Expansion

It is estimated that the global E-Cigarette market value will continue to expand by over $39.6 billion by 2024, with an estimated 10 year CAGR of 27.3%. North America, (Indicated above in red) will play a significant roll in this expansion. (source BIS Research)

In 2013, Nu Mark introduced MarkTen e-vapor products in Indiana and Arizona. During 2014, Nu Mark expanded MarkTen nationally. In April 2014, Nu Mark acquired the e-vapor business of Green Smoke, Inc. and its affiliates (“Green Smoke”), which has been selling e-vapor products since 2009. Although MarkTen has been in the marketplace only about a year, it's already available in over 130,000 stores nationwide and continues to evolve its product features.

Wine Market Expansion

In 2013, for the first time, the U.S. overtook France as the largest consumer of wine at 770 million gallons. (source BBC & USA Today) Over the last 14 years wine consumption in the U.S. per person has increased from 2.01 gallons per year in 2000 up to 3.14 gallons per year in 2014.

Page 15: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 Ste. Michelle Wine Estates is Altria’s largest wine investment and Washington state’s oldest winery. Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle, Columbia Crest, and 14 Hands. Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley and Erath in Oregon.

For 2014, Ste. Michelle’s reported wine shipment volume increased 4.8% driven by increased volume of 14 Hands and Chateau Ste. Michelle. From 2013 to 2014, net revenues increased $34 million (5.6%) and operating income increased by $16 million (13.6%), this was primarily due to a higher volume of shipments.

Chateau Ste. Michelle is one of the world’s leading producer’s of Riesling wine. (source Chateau Ste. Michelle) Riesling is a white grape variety which originated in the Rhine region of Germany and is the 20th largest variety grown. From July 2011 to July 2012 Chateau Ste. Michelle was #1 in total dollar sales at $93.8 million with a 6% increase from the previous year, based on the top 20 table wine brands that sold from $8-$11 in food and drug stores for a 52-week period. (source Wines & Vines) In 2013, Altria sold 7.9 million 9-litre cases of wine. Its sales volumes have grown at a five year CAGR of 7.3%. This is compared to a CAGR of 3.6% in total wine consumption in the U.S. over the same period of time. (source Forbes) Ste. Michelle has been able to grow its volume share in the U.S. wine market from 1.9% in 2009 to 2.2% in 2013. (source Forbes)

SABMiller

Altria currently has a 27% ownership stake in SABMiller (the world’s second largest brewer). (source 10-K) Some of SABMiller’s well known brands are Miller Lite, Miller Genuine Draft, Redd’s, Milwaukee’s Best, Fosters, Peroni, and Leinenkugel. (source SAB Miller)

SABMiller is one of Altria’s fastest growing investments. Since 2008, Altria's annual income from its share of SABMiller has jumped from $467 million to $991 million, as reported in 2013, with a CAGR of 16.2%. If Altria's income from SABMiller continues to expand at 16.2% per year, income from the holding will begin to rival cigarettes as Altria's main income source within a decade. (source the motley fool)

Page 16: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015

Operating Efficiency

• Altria has outperformed Phillip Morris Intl. and Reynold’s American every year when it comes to their

SG&A/Sales ratio. • With a decreasing ratio, we can see Altria gaining operating efficiencies.

Forecasting

Income Statement Forecast: 2010 2011 2012 2013 2014 AVERAGE

1. REVENUE GROWTH 0.4% -1.6% 5.3% 0.9% 1.6% 1.3%

2. GROSS MARGIN 54.8% 53.8% 54.6% 59.2% 56.6% 55.8%

3. OPERATING MARGIN 39.2% 40.1% 43.0% 47.3% 43.8% 42.7%

4. NET MARGIN 23.1% 20.4% 23.9% 25.7% 28.3% 24.3%

5. COMMON SHARES GROWTH 0.5% -0.6% -1.9% -1.2% -1.1% -0.9%

6. DIVIDEND GROWTH 10.6% 8.2% 7.6% 8.2% 8.7% 8.7%

MANUAL 2015E 2016E 2017E 2018E 2019E

1. REVENUE GROWTH 1.2% 1.1% 1.0% 0.7%

2. GROSS MARGIN 56.0%

3. OPERATING MARGIN 44.0%

4. NET MARGIN 29.5%

5. COMMON SHARES GROWTH 0.0% -0.5%

6. DIVIDEND GROWTH 7.0% 6.0% 5.0% 4.0% 3.0%

Page 17: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 Total Revenue: In 2009 Altria acquired UST Inc., a smokeless tobacco manufacturer that also owns vineyards. This acquisition helped to diversify the company's product portfolio by bringing in leading brands of smokeless tobacco, along with a wine business. We believe that a lower demand from the smokeable products segment would be partially offset by new revenue generated from the new smokeless tobacco and wine products from the acquisition of UST Inc., along with pricing changes to the existing product lines. Historically, over the past five years revenue has fluctuated around its average of 1.3%. Therefore, we chose the average growth rate for 2015 of 1.3% and tapered it down by 0.1% each of the following years, with a long term growth rate of 0.7%. 2015E 2016E 2017E 2018E 2019E Forecasted 1.3% 1.2% 1.1% 1% .7% * Revenue Growth (millions) $18,178 $18,396 $18,599 $18,785 $18,916

* Growing perpetuity rate

Historical Growth & Margins: Even though we expect the domestic cigarette industry volume to contract over the long term, we see that cigarette companies still have the ability to raise prices and therefore margins. As the largest U.S. cigarette manufacturer, we believe that Altria will lead this pricing strategy, so a lower smokeable products shipment volume will be partially offset by higher selling prices and this would cause margins to widen. However, we want to stay consistent with the margin of safety principle so we decided to not use lower margins.

Gross Margin Operating Margin Net Margin Forecasted Profit Margins 56% 44% 29.5%

Common Shares Growth: Altria Group authorized a $1.0 billion share repurchase program in July 2014 and the company expects to complete it by the end of 2015. At December 31, 2014, Altria Group, Inc. had approximately $518 million left to repurchase in the program. Therefore we have reduced the common shares base by about 0.5% in 2015, this accounts for the remaining shares to be repurchased. Altria did not specify any further plans about repurchasing or issuing stocks past 2015, therefore we used a manual 0% for the following years.

2015E 2016E 2017E 2018E 2019E Forecasted Common Shares -0.5% 0% 0% 0% 0%

Dividend Growth: Altria has been increasing its dividends per share after every fiscal year. Altria is forecasted to continue to grow the dividend with a 2015 forecast of 7% in 2015 and decrease by 1% every year, through 2019 with a long term growth rate of 3%.

2015E 2016E 2017E 2018E 2019E Forecasted Dividend Growth 7% 6% 5% 4% 3%

Page 18: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 Balance Sheet:

2010 2011 2012 2013 2014 AVERAGE

1. CASH AND EQUIVALENTS 13.7% 19.7% 16.6% 18.0% 18.5% 17.3%

2. TOTAL RECEIVABLES 0.5% 1.6% 1.1% 0.7% 0.7% 0.9%

3. INVENTORY 10.7% 10.7% 10.0% 10.6% 11.4% 10.7%

Cash and Equivalents: We have leveled off Altria’s cash and Equivalents over the next five years due to small company acquisitions, future long-term debt payments that are specified in 10-k of $3.8 billion over the next five years and possibility of additional share repurchase programs through 2019. For these reasons we have used 18% through 2019 to reflect only a natural increase in cash and equivalents in relation to sales. 2015E 2016E 2017E 2018E 2019E Cash & Equivalents 18% 18% 18% 18% 18%

Total Receivables and Inventory: Total Receivables and Inventory have stayed very close to the average over the last 5 years, so we decided to stay with the average values of 0.9% and 10.7% respectively.

Total Receivables Inventory Forecasted Profit Margins 0.9% 10.7%

Balance Sheet:

Total Current Assets, Net PPE & Total Assets: Altria’s total current assets, net PPE and total assets have been steadily decreasing over the last five years. We adjusted them slightly up due to analysts’ and the company’s projections of a company expansion into smokeless tobacco and wine products.

2015E 2016E 2017E 2018E 2019E Total Current Assets 48% 48% 48% 48% 48% Net PPE 12% 12% 12% 12% 12% Total Assets 193% 193% 193% 193% 193%

2010 2011 2012 2013 2014 AVERAGE

4. TOTAL CURRENT ASSETS 62.1% 63.1% 50.8% 48.6% 47.3% 54.4% 5. NET PPE 14.1% 13.3% 12.0% 11.5% 11.1% 12.4% 6. TOTAL ASSETS 221.4% 221.1% 201.9% 197.4% 192.1% 206.8% 7. PAYABLES AND ACCRUALS 14.8% 14.2% 13.1% 12.3% 11.7% 13.2% 8. TOTAL CURRENT LIABILITIES 40.5% 44.7% 47.2% 40.0% 42.8% 43.0% 9. TOTAL DEBT 72.2% 78.8% 71.0% 79.2% 76.3% 75.5% 10. TOTAL EQUITY 30.9% 22.4% 18.3% 23.5% 17.0% 22.4%

Page 19: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 Payables and Accruals: Payable and Accruals have been slowly decreasing, for the last five years. We decided to follow this trend in years 2015 and 2016 and level it off by using a manual 11%.

2015E 2016E 2017E 2018E 2019E Payables & Accruals 11.5% 11% 11% 11% 11%

Total Current Liabilities: Total Current Liabilities has been fluctuating in a range between 40% and 47% with the average of 43% over the last five years. Therefore we used manual 44% which is slightly higher than the average in order to stay consistent with our margin of safety principle.

2015E 2016E 2017E 2018E 2019E Total Current Liabilities 44% 44% 44% 44% 44%

Total Debt: Over the last five years, Altria’s Total Debt to Sales has increased from 72.2% to 76.3%. Altria has specified in their 10-K future long-term debt payments of $3.8 billion over the next five years. However the company has left open the possibility of more acquisitions in the future. Therefore we left an average value of 75.5%.

2015E 2016E 2017E 2018E 2019E Total Debt 75.5% 75.5% 75.5% 75.5% 75.5

Total Equity:

Historically, the ratio of Total Equity to Sales has been in a steady decline from 30.9% in 2010 to 17% in 2014. From 2010 to 2012 it declined by about 12% and from 2012 to 2014 it declined only 1%. We believe that the decline is slowing down and that Total Equity will not go any lower so we leveled it off using a manual 17%.

2015E 2016E 2017E 2018E 2019E Total Equity 17% 17% 17% 17% 17%

Page 20: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 Financial Analysis and Valuation

We found from their 10k that their average cost of debt is currently sitting around 5.7%. We adjusted the Beta both to stress the model, and to reflect the recent trend upwards in their Beta. Despite this relatively high cost of debt, their WACC remains low at a paltry 6%. This low WACC, in combination with their high ROIC, gives them power to generate a high EVA going forward.

Despite Altria’s fantastic story of profitability and growth, it does model up as slightly over valued based on discounted free cash flows. Thought we expect the stock to continue to be overvalued in this model going forward, we are still adamantly in favor of acquiring a position in it based the Dividend Discount Model.

The stock model’s up incredibly well on the DDM, with the reasonable dividend growth rates previously discussed, Altria stock has an expected return of 13% based on dividends alone, and is about 15$ or roughly 30% undervalued.

Page 21: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

Washburn University Applied Portfolio Management Spring 2015 Conclusion

• Altria maintains a strong competitive advantage over their competitors through high levels of operating efficiency. • Altria is pursuing diversification into growth markets through organic growth in the e-cig market, acquisition of high quality wine brands, and their stake in SABMiller. • Altria is well positioned to maintain market dominance and therefore revenue in their tobacco

segments. • Altria has a stable dividend that maintains a position at 4% or above, higher than the portfolio average. • Altria has an incredible ROIC that hovers around 100%, well above the portfolio average. • Altria has an operating margin of roughly 45%, also well above the portfolio average. • Our bleak macro-economic outlook means that transitioning into a low beta ( 5 year beta = .549)

consumer staples stock positions the portfolio to take advantage of the anticipated flight to safety by investors.

Pre-Adjustment Portfolio Averages

Page 22: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

MO Altria Group Inc. Sector Consumer Staples

2009 2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E

Total Revenue 16,824 16,892 16,619 17,500 17,663 17,945 1.3% N/A 18,178 18,396 18,599 18,785 18,916

Cost of Goods Sold 7,815 7,629 7,680 7,937 7,206 7,785

Gross Profit 9,009 9,263 8,939 9,563 10,457 10,160 55.8% 56.0% 10,180 10,302 10,415 10,519 10,593

SG&A Expense 2,514 2,456 2,273 2,095 2,075 2,298

R&D Expense 0 0 0 0 0 0

Dep. & Amort. 20 20 20 0 0 0

Other Oper. Exp. 10,437 10,274 9,959 9,980 9,303 10,085

Operating Income 6,387 6,618 6,660 7,520 8,360 7,860 42.7% 44.0% 7,998 8,094 8,183 8,265 8,323

Interest Expense (1,189) (1,136) (1,220) (1,128) (1,053) (857)

Other Non‐Oper. Exp. 600 628 730 1,224 991 1,006

EBT ex‐Unusuals 5,802 6,113 6,174 7,618 8,302 8,058

Total Unusual Exp. (925) (390) (592) (1,141) (1,360) (284)

Earnings Before Tax 4,877 5,723 5,582 6,477 6,942 7,774

Income Tax Expense 1,669 1,816 2,189 2,294 2,407 2,704

Net Income 3,206 3,905 3,390 4,180 4,535 5,070 24.3% 29.5% 5,363 5,427 5,487 5,542 5,580

Basic EPS 1.55 1.87 1.64 2.06 2.26 2.56 2.72 2.76 2.79 2.82 2.84

Total Common Shares 2,066 2,077 2,064 2,024 1,999 1,978 ‐0.9% 0.0% 1,968 1,968 1,968 1,968 1,968

Dividends Per Share 1.32 1.46 1.58 1.70 1.84 2.00 8.7% N/A 2.14 2.27 2.38 2.48 2.55

2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E

1. Revenue Growth 0.4% ‐1.6% 5.3% 0.9% 1.6% 1.3% 1.3% 1.2% 1.1% 1.0% 0.7%

2. Gross Margin 54.8% 53.8% 54.6% 59.2% 56.6% 55.8% 56.0%

3. Operating Margin 39.2% 40.1% 43.0% 47.3% 43.8% 42.7% 44.0%

4. Net Margin 23.1% 20.4% 23.9% 25.7% 28.3% 24.3% 29.5%

5. Common Shares Growth 0.5% ‐0.6% ‐1.9% ‐1.2% ‐1.1% ‐0.9% 0.0% ‐0.5%

6. Dividend Growth 10.6% 8.2% 7.6% 8.2% 8.7% 8.7% 7.0% 6.0% 5.0% 4.0% 3.0%

4. Net Income 5. Total Common Shares 6. Dividends Per Share

Historical Growth and Margins Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year‐by‐Year Values

1. Total Revenue 2. Gross Profit 3. Operating Income

$15,000

$16,000

$17,000

$18,000

$19,000

$8,000

$9,000

$10,000

$11,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$0

$2,000

$4,000

$6,000

$0.00

$1.00

$2.00

$3.00

1,900

1,950

2,000

2,050

2,100

MO. Datasource: CapitalIQ Income Statement Forecast, Page 1 of 1 Alexander Anguiano, Travis Hirt, Arek Kozaczuk and Bryan Lunzmann

Page 23: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

MO Altria Group Inc. Sector Consumer Staples

ASSETS 2009 2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E

Cash and Equivalents 1,871 2,314 3,270 2,900 3,175 3,321 17.3% 18.0% 3,272 3,311 3,348 3,381 3,405

Short‐Term Investments 0 0 0 0 0 0

Total Cash & ST Invest. 1,871 2,314 3,270 2,900 3,175 3,321

Total Receivables 96 85 268 193 115 124 0.9% N/A 166 168 170 171 173

Inventory 1,810 1,803 1,779 1,746 1,879 2,040 10.7% N/A 1,940 1,963 1,985 2,005 2,019

Prepaid Expenses 0 0 0 0 0 0

Total Current Assets 10,576 10,483 10,479 8,896 8,587 8,492 54.4% 48.0% 8,726 8,830 8,927 9,017 9,080

Gross PPE 6,144 5,150 4,728 4,750 4,817 4,755

Accumulated Depr. (3,460) (2,770) (2,512) (2,648) (2,789) (2,772)

Net PPE 2,684 2,380 2,216 2,102 2,028 1,983 12.4% 12.0% 2,181 2,208 2,232 2,254 2,270

Long‐Term Investments 4,980 5,367 5,509 6,637 6,455 6,183

Goodwill 5,174 5,174 5,174 5,174 5,174 5,285

Total Assets 36,677 37,402 36,751 35,329 34,859 34,475 206.8% 193.0% 35,084 35,505 35,896 36,255 36,508

LIABILITIES AND EQUITY 2,872 2,508 2,356 2,296 2,180 2,106

Accounts Payable 494 529 503 451 409 416 Note: Forecasting Payables + Accruals together in row 19 below

Accrued Expenses 2,378 1,979 1,853 1,845 1,771 1,690 13.2% 11.0% 2,091 2,024 2,046 2,066 2,081

Short‐Term Debt 0 0 0 0 0 0

Total Current Liabilities 7,992 6,840 7,432 8,259 7,058 7,673 43.0% 44.0% 7,998 8,094 8,183 8,265 8,323

Long‐Term Debt 11,185 12,194 13,089 12,419 13,992 13,693 75.5% N/A 13,722 13,887 14,040 14,180 14,279

Pension Benefits 3,483 3,593 4,021 4,239 2,367 3,473 11,185 12,194 13,089 12,419 13,992 13,693

Total Liabilities 32,573 32,175 33,036 32,125 30,706 31,430 Note: Forecasting ST Debt + LT Debt together in row 22 above

Preferred Equity 0 0 0 0 0 0

Common Stock & APIC 6,932 6,686 6,609 6,623 6,649 6,670

Retained Earnings 22,599 23,459 23,583 24,316 25,168 26,277

Treasury Stock (23,901) (23,469) (24,625) (25,731) (26,320) (27,251)

Total Common Equity 4,069 5,192 3,680 3,168 4,119 3,014

Total Equity 4,104 5,227 3,715 3,204 4,153 3,045 22.4% 17.0% 3,090 3,127 3,162 3,193 3,216

Total Liab. and Equity 36,677 37,402 36,751 35,329 34,859 34,475

2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E

1. Cash and Equivalents 13.7% 19.7% 16.6% 18.0% 18.5% 17.3% 18.0%

2. Total Receivables 0.5% 1.6% 1.1% 0.7% 0.7% 0.9%

3. Inventory 10.7% 10.7% 10.0% 10.6% 11.4% 10.7%

Percent of Sales Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year‐by‐Year Values

2. Total Receivables1. Cash and Equivalents 3. Inventory

$0

$1,000

$2,000

$3,000

$4,000

$0

$100

$200

$300

$1,500

$1,600

$1,700

$1,800

$1,900

$2,000

$2,100

MO. Datasource: CapitalIQ Balance Sheet Forecast, Page 1 of 2 Alexander Anguiano, Travis Hirt, Arek Kozaczuk and Bryan Lunzmann

Page 24: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

2010 2011 2012 2013 2014 Average Manual 2015E 2016E 2017E 2018E 2019E

4. Total Current Assets 62.1% 63.1% 50.8% 48.6% 47.3% 54.4% 48.0%

5. Net PPE 14.1% 13.3% 12.0% 11.5% 11.1% 12.4% 12.0%

6. Total Assets 221.4% 221.1% 201.9% 197.4% 192.1% 206.8% 193.0%

7. Payables and Accruals 14.8% 14.2% 13.1% 12.3% 11.7% 13.2% 11.0% 11.5%

8. Total Current Liabilities 40.5% 44.7% 47.2% 40.0% 42.8% 43.0% 44.0%

9. Total Debt 72.2% 78.8% 71.0% 79.2% 76.3% 75.5%

10. Total Equity 30.9% 22.4% 18.3% 23.5% 17.0% 22.4% 17.0%

7. Payables and Accruals 8. Total Current Liabilities 9. Total Debt

10. Total Equity

4. Total Current Assets 5. Net PPE 6. Total Assets

Percent of Sales Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year‐by‐Year Values

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$32,000

$34,000

$36,000

$38,000

$0

$1,000

$2,000

$3,000

$0

$1,000

$2,000

$3,000

$0

$5,000

$10,000

$15,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$0

$2,000

$4,000

$6,000

MO. Datasource: CapitalIQ Balance Sheet Forecast, Page 2 of 2 Alexander Anguiano, Travis Hirt, Arek Kozaczuk and Bryan Lunzmann

Page 25: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

MO. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 5 Copyright Robert A. Weigand, Ph.D., 2013

MO Altria Group Inc. Sector Consumer Staples Report Date 5/8/2015 2009

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Total Revenue 16,824 16,892 16,619 17,500 17,663 17,945 18,178 18,396 18,599 18,785 18,916Gross Profit 9,009 9,263 8,939 9,563 10,457 10,160 10,180 10,302 10,415 10,519 10,593Operating Income 6,387 6,618 6,660 7,520 8,360 7,860 7,998 8,094 8,183 8,265 8,323Net Income 3,206 3,905 3,390 4,180 4,535 5,070 5,363 5,427 5,487 5,542 5,580Retained Earnings 22,599 23,459 23,583 24,316 25,168 26,277 27,428 28,390 29,189 29,856 30,414Total Common Shares 2,066 2,077 2,064 2,024 1,999 1,978 1,968 1,968 1,968 1,968 1,968Total Diluted Shares 2,071 2,079 2,064 2,024 1,999 1,978 1,968 1,968 1,968 1,968 1,968Earnings Per Share $1.55 $1.88 $1.64 $2.07 $2.27 $2.56 $2.72 $2.76 $2.79 $2.82 $2.84Dividends Per Share $1.32 $1.46 $1.58 $1.70 $1.84 $2.00 $2.14 $2.27 $2.38 $2.48 $2.55

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Cash and Equivalents 1,871 2,314 3,270 2,900 3,175 3,321 3,272 3,311 3,348 3,381 3,405Total Receivables 96 85 268 193 115 124 166 168 170 171 173Inventory 1,810 1,803 1,779 1,746 1,879 2,040 1,940 1,963 1,985 2,005 2,019Total Current Assets 10,576 10,483 10,479 8,896 8,587 8,492 8,726 8,830 8,927 9,017 9,080Net PPE 2,684 2,380 2,216 2,102 2,028 1,983 2,181 2,208 2,232 2,254 2,270Total Assets 36,677 37,402 36,751 35,329 34,859 34,475 35,084 35,505 35,896 36,255 36,508Payables and Accruals 2,872 2,508 2,356 2,296 2,180 2,106 2,091 2,024 2,046 2,066 2,081Total Current Liabilities 7,992 6,840 7,432 8,259 7,058 7,673 7,998 8,094 8,183 8,265 8,323Total Debt 11,185 12,194 13,089 12,419 13,992 13,693 13,722 13,887 14,040 14,180 14,279Total Equity 4,104 5,227 3,715 3,204 4,153 3,045 3,090 3,127 3,162 3,193 3,216

Historical Income Statement Highlights Forecasted Income Statement Highlights

Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights

$15,000$15,500$16,000$16,500$17,000$17,500$18,000$18,500$19,000$19,500

Total Revenue

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000Net Income

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000Total Current Assets Cash and Equivalents

02,0004,0006,0008,00010,00012,00014,00016,000

0

1,000

2,000

3,000

4,000

5,000

6,000Total Equity Total Debt

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00Earnings Per Share Dividends Per Share

$0$5,000

$10,000$15,000$20,000$25,000$30,000$35,000$40,000

Total Assets Net PPE

Page 26: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

MO. Datasource: CapitalIQ Financial Analysis & Valuation, Page 2 of 5 Copyright Robert A. Weigand, Ph.D., 2013

Margins 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Gross Profit Margin 53.5% 54.8% 53.8% 54.6% 59.2% 56.6% 56.0% 56.0% 56.0% 56.0% 56.0%Operating Profit Margin 38.0% 39.2% 40.1% 43.0% 47.3% 43.8% 44.0% 44.0% 44.0% 44.0% 44.0%Net Profit Margin 19.1% 23.1% 20.4% 23.9% 25.7% 28.3% 29.5% 29.5% 29.5% 29.5% 29.5%Free Cash Flow Margin 18.8% 23.9% 17.7% 30.8% 28.8% 26.6% 28.1% 27.8% 28.4% 28.4% 28.5%

Liquidity and Debt 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Days Sales Outstanding 2.08 1.84 5.89 4.03 2.38 2.52 3.33 3.33 3.33 3.33 3.33Inventory Turnover 9.30 9.37 9.34 10.02 9.40 8.80 9.37 9.37 9.37 9.37 9.37Total Debt to Equity 272.5% 233.3% 352.3% 387.6% 336.9% 449.7% 444.0% 444.0% 444.0% 444.0% 444.0%Total Debt to Assets 30.5% 32.6% 35.6% 35.2% 40.1% 39.7% 39.1% 39.1% 39.1% 39.1% 39.1%

Profitability 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Total Asset Turnover 0.46 0.45 0.45 0.50 0.51 0.52 0.52 0.52 0.52 0.52 0.52Equity Multiplier 8.94 7.16 9.89 11.03 8.39 11.32 11.35 11.35 11.35 11.35 11.35Return on Assets 8.7% 10.4% 9.2% 11.8% 13.0% 14.7% 15.3% 15.3% 15.3% 15.3% 15.3%Return on Equity 78.1% 74.7% 91.3% 130.5% 109.2% 166.5% 173.5% 173.5% 173.5% 173.5% 173.5%Return on Capital 117.1% 110.9% 78.2% 104.6% 108.9% 95.6% 95.4% 93.8% 93.8% 93.8% 93.8%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

0.40.40.40.50.50.50.50.5

Total Asset Turnover Equity Multiplier

8

9

9

10

10

11

01234567

Days Sales Outstanding Inventory Turnover

0%10%20%30%40%50%60%70%

Gross Profit Margin Operating Profit Margin

0%5%

10%15%20%25%30%35%

Net Profit Margin Free Cash Flow Margin

0%

100%

200%

300%

400%

500%Total Debt to Equity Total Debt to Assets

0%

50%

100%

150%

200%Return on Equity Return on Assets

0%

50%

100%

150%

200%Return on Equity Return on Capital

Page 27: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

MO. Datasource: CapitalIQ Financial Analysis & Valuation, Page 3 of 5 Copyright Robert A. Weigand, Ph.D., 2013

Capital, NOPAT & FCF 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

NOWC 905 1,694 2,961 2,543 2,989 3,379 3,287 3,419 3,456 3,491 3,515Net Fixed Assets 2,684 2,380 2,216 2,102 2,028 1,983 2,181 2,208 2,232 2,254 2,270Total Invested Capital 3,589 4,074 5,177 4,645 5,017 5,362 5,469 5,626 5,688 5,745 5,785Effective Tax Rate 34.2% 31.7% 39.2% 35.4% 34.7% 34.8%NOPAT 4,201 4,518 4,048 4,857 5,461 5,126 5,216 5,279 5,337 5,390 5,428Free Cash Flow N/A 4,033 2,945 5,389 5,089 4,781 5,110 5,121 5,275 5,334 5,388NOPAT Per Share 2.03 2.18 1.96 2.40 2.73 2.59 2.65 2.68 2.71 2.74 2.76FCF/Share N/A 1.94 1.43 2.66 2.55 2.42 2.60 2.60 2.68 2.71 2.74Return on Capital 117.1% 110.9% 78.2% 104.6% 108.9% 95.6% 95.4% 93.8% 93.8% 93.8% 93.8%

Intrinsic Value of FCFs Valuation ModelValue Creation 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Economic Value-Added 3,984 4,271 3,734 4,575 5,157 4,801 4,885 4,938 4,992 5,042 5,077Market Valued-Added 36,452 45,909 57,483 60,431 72,589 94,411 84,611 85,280 85,857 86,433 87,038PV of Future FCFs 91,046 92,535 95,203 95,588 96,296 97,356 98,151 98,983 99,711 100,425 101,128Value of Non-Oper. Assets 1,871 2,314 3,270 2,900 3,175 3,321 3,272 3,311 3,348 3,381 3,405Total Intrinsic Firm Value 92,917 94,849 98,473 98,488 99,471 100,677 101,423 102,294 103,059 103,806 104,533Intrinsic Value of Equity 81,732 82,655 85,384 86,069 85,479 86,984 87,701 88,407 89,019 89,626 90,254Per Share Intrinsic Value $39.56 $39.80 $41.37 $42.52 $42.76 $43.98 $44.56 $44.92 $45.23 $45.54 $45.86 -0.0142508Year-End Stock Price $19.63 $24.62 $29.65 $31.44 $38.39 $49.27 $51.62Over (Under) Valuation/Sh ($19.93) ($15.18) ($11.72) ($11.08) ($4.37) $5.29% Over (Under) Valued -101.5% -61.6% -39.5% -35.3% -11.4% 10.7%

Cost of Capital 2014 Weight % Cost Wgt CostEquity Capitalization 97,456 87.7% 6.4% 5.6%

Total Debt 13,693 12.3% 5.7% 0.5%Preferred Stock 0 0.0% 0.0% 0.0%Value of All Securities 111,149 100.0%Effective Tax Rate 34.8% Long-Term Growth Rate:Risk-Free Rate 1.895% 0.7%5-Yr Beta 0.549 Alternative Beta:Market Risk Premium 6.00% 0.75CAPM Cost of Equity 6.395%

6.065%

(Tax rate from last historical year used in forecasts)

Weighted Average Cost of Capital:

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Economic Value-Added Market Valued-Added

$0

$10

$20

$30

$40

$50

$60

Year-End Stock Price Per Share Intrinsic Value

-120%-100%-80%-60%-40%-20%0%20%

($25)($20)($15)($10)

($5)$0$5

$10

2009 2010 2011 2012 2013 2014

Over (Under) Valuation/Sh % Over (Under) Valued

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000

Total Invested Capital Net Fixed Assets

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000NOPAT Free Cash Flow

Page 28: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

MO. Datasource: CapitalIQ Financial Analysis & Valuation, Page 4 of 5 Copyright Robert A. Weigand, Ph.D., 2013

Relative Valuation 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Stock Price/Intr. Value $19.63 $24.62 $29.65 $31.44 $38.39 $49.27 $44.56 $44.92 $45.23 $45.54 $45.86Price to Earnings 12.6 13.1 18.1 15.2 16.9 19.2 16.4 16.3 16.2 16.2 16.2Price to Free Cash Flow N/A 12.7 20.8 11.8 15.1 20.4 17.2 17.3 16.9 16.8 16.8Price to Sales 2.4 3.0 3.7 3.6 4.3 5.4 4.8 4.8 4.8 4.8 4.8Price to Book 1.1 1.4 1.7 1.8 2.2 2.8 2.5 2.5 2.5 2.5 2.5Earnings Yield 7.9% 7.6% 5.5% 6.6% 5.9% 5.2% 6.1% 6.1% 6.2% 6.2% 6.2%Dividend Yield 6.7% 5.9% 5.3% 5.4% 4.8% 4.1% 4.8% 5.0% 5.3% 5.4% 5.6%Free Cash Flow Yield N/A 7.9% 4.8% 8.5% 6.6% 4.9% 5.8% 5.8% 5.9% 6.0% 6.0%

Relative Valuation Pricing Model Adjust 2015E Target Dividend Discount Valuation Model 2015E Ratio Ratio Ratio Metric Price MO Altria Group Inc.

Price to Earnings 16.4 18.0 $2.72 $49.05 7.0% 6.0% 5.0% 4.0% 3.0%Price to Free Cash Flow 17.2 $2.60 $44.56 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019EPrice to Sales 4.8 4.0 $9.24 $36.95 $1.32 $1.46 $1.58 $1.70 $1.84 $2.00 $2.14 $2.27 $2.38 $2.48 $2.55Price to Book 2.5 $17.83 $44.56

1-Yr Div Growth 8.7% PV Dividends 1-4 $7.93 Dividend Yield 4.1%2015E 3-Yr Div Growth 8.2% PV Perpetual Div. $58.65

Current Price $51.62 5-Yr Div Growth 8.7% Intrinsic Value $66.57 If Purchased For: $51.62PV of Free Cash Flows $44.56 Risk-Free Rate 1.90% Current Price $51.62 Expected Return = 13.0% 9.85%Dividend Discount Model $66.57 5-Yr Beta 0.55 ($51.62) $2.14 $2.27 $2.38 $77.63 $75.15Price to Earnings $49.05 Market Premium 6.0% Analyst Notes:Price to Free Cash Flow $44.56 Required Return 6.4% Based on a current dividend of $2.00, expected growth as shown above and an equity requiredPrice to Sales $36.95 Alternative Beta 0.75 return of 6.4%, MO is worth $66.57 per share, vs. a current price of $51.62.Price to Book $44.56

Compared With: Compared With:

Philip Morris International, Inc. S&P 500 Index

Reynolds American Inc.

Expected Dividend Growth Rates

Estimated Target Prices vs.

May 8, 2015Annual Dividend

0

5

10

15

20

25Price to Earnings Price to Free Cash Flow

0.0

1.0

2.0

3.0

4.0

5.0

6.0Price to Sales Price to Book

0%1%2%3%4%5%6%7%8%9%

Earnings Yield Dividend Yield

$0

$10

$20

$30

$40

$50

$60

$70

Current Price PV of FreeCash Flows

DividendDiscount

Model

Price toEarnings

Price to FreeCash Flow

Price to SalesPrice to Book

Estimated Target Prices vs. Current Price

-10%

0%

10%

20%

30%

40%

50%

60%MO PM RAI

-10%

0%

10%

20%

30%

40%

50%

60%MO ^SPX

Page 29: MO Altria Group Inc. Sector: Consumer Staples BUYMO Altria Group Inc. Sector: Consumer Staples BUY Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes,

MO. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 5 Copyright Robert A. Weigand, Ph.D., 2013

Piotroski Financial Fitness Scorecard (10-point scale) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Positive Net Income 1 1 1 1 1 1 1 1 1 1Positive Free Cash Flow 1 1 1 1 1 1 1 1 1 1Growing ROA (% change NI > % change TA) 1 0 1 1 1 1 0 0 1 0Earnings Quality (Operating Income > Net Income) 1 1 1 1 1 1 1 1 1 1Total Assets Growing Faster Than Total Liabilities 1 0 0 0 0 1 0 0 0 0Increasing Liquidity (Current Ratio) 1 1 0 1 0 0 0 0 0 0% Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1 1 1 1 1 1 1Expanding Gross Margin 1 0 1 1 0 0 0 0 0 0Asset Turnover (% change sales > % change assets) 0 1 1 1 1 0 0 0 1 0Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 1 1 1 1 1 1Piotroski Score 9 7 8 9 7 7 5 5 7 5

Altman Probability of Bankruptcy Z-Score Weight 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

(Current Assets-Current Liabilities)/Total Assets 1.200 0.1169 0.0995 0.0216 0.0526 0.0285 0.0249 0.0249 0.0249 0.0249 0.0249Retained Earnings/Total Assets 1.400 0.8459 0.8937 0.9345 0.9766 1.0221 1.0486 1.0815 1.1073 1.1272 1.1449Earnings Before Interest & Tax/Total Assets 3.300 0.5839 0.5980 0.7024 0.7914 0.7524 0.7523 0.7523 0.7523 0.7523 0.7523Market Value Equity/Total Liabilities 0.600 0.9536 1.1115 1.1885 1.4995 1.8604 1.6447 1.6383 1.6317 1.6265 1.6265Sales/Total Assets 0.999 0.4512 0.4518 0.4948 0.5062 0.5200 0.5176 0.5176 0.5176 0.5176 0.5176Altman Score 2.95 3.15 3.34 3.83 4.18 3.99 4.01 4.03 4.05 4.07

The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23

0

2

4

6

8

10

Piotroski Financial Fitness Scorecard (10-pt scale)

0112233445

Altman Probability of Bankruptcy Z-Score