Altia (MO 0.57%) has been a market laggard this year, with its 5% year-to-date gain trailing the S&P 500's 7% growth. It was also left behind by its overseas counterpart Philip Morris International (PM -0.21%), which rallied 23% during that period.

That weakness might cause investors to wonder if Altria -- which more than doubled in value over the past five years -- has peaked. Let's discuss the bearish and bullish cases to see if the stock is running out of steam or merely taking a breather.

Altria's flagship Marlboro cigarettes.

Image source: Pixabay.

Why Altria might be out of steam...

Altria generates all of its cigarette sales from the U.S. -- a market where adult smoking rates have consistently declined for over five decades. To offset those declining shipments, Altria raises prices. But states have also consistently hiked their excise taxes, making a pack of cigarettes much more expensive for the American smoker.

If we look at Altria's year-over-year growth in cigarette shipments and its total revenue, we'll notice that the company can usually squeeze out top line gains with its price hikes.
















Year-over-year growth. Source: Altria quarterly reports.

This business model has held up well over the past few decades, but the price of cigarettes in high-tax states like Illinois and New York are already well above $10 per pack. If other states follow their lead as smoking rates keep falling, Altria will need to invest more heavily in its smaller wine, e-cigarette, and smokeless tobacco units to continue growing.

Looking ahead, British American Tobacco's (BTI 0.86%) planned takeover of Reynolds American (RAI) could put a lot of pressure on Altria with its superior scale and pricing power -- leading to market share losses for Altria's flagship Marlboro brand. Meanwhile, rising interest rates could convince income investors to dump big dividend stocks like Altria in favor of bonds with comparable yields.

Why Altria might just be taking a breather...

If you've been watching Altria's valuation, you've noticed that its trailing P/E fell from about 25 at the end of 2016 to about 10 today -- which is much lower than the industry average of 16 for cigarette companies. That drop reflects the huge earnings boost it received from Anheuser-Busch InBev's (BUD 0.43%) recent merger with SABMiller, which Altria held a 27% stake in.

A frosty mug of beer.

Image source: Pixabay.

That's why its reported diluted earnings surged 173% to $7.28 per share in 2016, although its adjusted earnings (which exclude the SABMiller impact) rose just 8% to $3.03. That earnings boost was temporary, but the extra cash could give Altria more room to scale up to counter British American or expand more aggressively into non-cigarette markets. Altria also still owns a near-10% stake in the newly merged company, which could boost its bottom line growth.

Moreover, Altria's lower P/E could insulate it from an interest rate hike-fueled sell-off of blue chip dividend stocks, since it's likely that income stocks with higher valuations would be sold first.

There's also a rumor that Philip Morris International, which was spun off of Altria in 2008, could buy out its domestic counterpart to directly counter British American's purchase of Reynolds American. Wells Fargo analyst Bonnie Herzog suggests that the likelihood of that merger occurring is 70% -- so investors who sell Altria today might regret it in the near future.

The verdict: Altria is just taking a breather

Altria's year-to-date performance isn't impressive, but its valuation is reasonable, it's a likely buyout target, and analysts still expect its revenue and earnings to respectively grow 2% and 9% this year.

Altria isn't a buy and hold "forever" stock, since it can't raise prices, cut costs, or repurchase shares "forever" to offset declining cigarette shipments. But that business model should still hold up well for the next few years, which should give the company plenty of time to evolve its business model and diversify into other adjacent markets.