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Altria Group, Inc.
Re: Analyst Comments

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By BuildMWell
February 1, 2005

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From the article: "Goldman Sachs reiterated an "outperform" rating on Altria (NYSE: MO), saying the company is set to deliver solid growth in 2005. "We continue to look for strong upside potential for the stock, as our sum-of-the-parts analysis continues to point to an $80 stock price today," Goldman said. The research firm lowered the 2005 and 2006 earnings-per-share estimate on Altria to $5.13 and $5.48, respectively, from $5.22 and $5.57."

OK, this is good news in one respect and bad news in another. I agree with every word that Goldman Sachs has to offer and I think this will stir investors to buy the stock, which should drive the price up. That, of course, is what Goldman is saying will happen. But, let's look at what they are really saying:

2004 Price = $64/share EPS = $4.67 P/E = 13.67
2005 Price = $72/share EPS = $5.13 P/E = 14.03 Price increase = +12+%
2006 Price = $80/share EPS = $5.48 P/E = 14.60 Price increase = +12+%

For some reason, they expect the P/E Ratio to grow over time. Why? And, how fast will it happen? That is the key.

They show the price increasing at a CAGR of over 12% but Goldman Sachs admits they expect MO's earnings are going to grow at 9% in 2005 and 7% in 2006. Thus, they expect something for nothing. I am not saying it won't happen, but I think that we need to watch our shares very closely. I see some hype coming to over-value the stock. That can only lead to a collapse in the stock price in the future. Or, MO has to do far better at making an increasing profit on their business activity. But, how much can they do to grow their business and increase their earnings?

The BMW Method tells me that Philip Morris stock has grown at a CAGR of 26.2% since early 2000. Investors who bought then at about $20/share have received a dividend of about 10% plus that super 26% CAGR. But, we all know that 26% compound growth is not sustainable for Philip Morris stock. Actually, the 12% that is proposed by Goldman Sachs is sustainable but not after 5 years of 26+% growth. In my estimation, MO is already slightly over-priced from a historical standpoint.

There was another great buying opportunity at just under $30/share in early 2003. The dividend yield was about 8.6% then but the shares have more than doubled in two years for a nice 45% CAGR. Of course, that is less sustainable than 26%.

The best opportunity came last fall when MO was down to $45/share. In about a half-year the stock has jumped in price 42% which is a CAGR of 100%! We know that is nuts.

But, this is the way it goes. This is how bubbles form. The hype builds slowly until everyone wants to be an owner...they hate to miss the boat. Obviously, MO was severely under-priced in 2000 and it was over-valued prior to that in 1998 and 1999. $80/share today is a plausible price and I expect we can see it in not too many months. But, that does not make the $80/share price too high.

Now, none of this is unusual because stocks always go from under-valued to over-valued because the market is always over and under-estimating the capability of the stock. But, isn't it interesting that we have been high on MO since 2000 right here and the gurus are just now beginning to come on-board?

So, as Goldman and the other brokers sell shares to their investors and the price rises in the future, we need to be planning our exit strategy. I love good news but I have learned to be wary of it. I think that it pays to read between the lines and be ahead of the curves.


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