Over the past six months, Altria has been a great trade, beating the S&P 500 by 12.6%. Its stock price has climbed to $69.21, representing a healthy 20.3% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy MO? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why Does Altria Spark Debate?
Best known for its Marlboro brand of cigarettes, Altria (NYSE: MO) offers tobacco and nicotine products.
Two Things to Like:
1. Elite Gross Margin Powers Best-In-Class Business Model
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
Altria has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 87.7% gross margin over the last two years. That means for every $100 in revenue, only $12.34 went towards paying for raw materials, production of goods, transportation, and distribution.
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Altria has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the consumer staples sector, averaging an eye-popping 42% over the last two years.
One Reason to be Careful:
Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Altria struggled to consistently increase demand as its $20.38 billion of sales for the trailing 12 months was close to its revenue three years ago. This wasn’t a great result, but there are still things to like about Altria.
Final Judgment
Altria’s merits more than compensate for its flaws, and with its shares topping the market in recent months, the stock trades at 12.2× forward P/E (or $69.21 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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