The Federal Reserve has steadily increased interest rates over the last two years in an effort to curb inflation. One industry hit hard by this dynamic is consumer staples. According to November's report from the Bureau of Labor Statistics, food is one area where consumers are feeling the most pocket pain.
One sector adjacent to food that is feeling inflationary repercussions is tobacco. Tobacco products can often be found in grocery stores and gas stations. But as shoppers are forgoing certain purchases and only buying the necessities, companies like Altria Group (MO -0.37%) are feeling the heat.
Despite headwinds from a stormy macroeconomic picture, investor sentiment around Altria may be overblown. With the stock trading at a dividend yield of 9.5%, now might be a stealthy opportunity to scoop on some shares at a cheap valuation.
What is going on at Altria?
On the surface, Altria is not in the most enviable position. The impacts that inflation and high borrowing costs have on consumers is obvious. As goods and services cost more money, your purchasing power does not go as far. As such, most shoppers are forced to forgo certain purchases. However, chalking up Altria's challenges to a cloudy economy is a bit shortsighted.
While the company sells a variety of tobacco products, its most recognizable is cigarette brand Marlboro, which owns over 40% of retail cigarette sales nationwide. Demand for cigarettes has been plummeting for many years. As consumers are becoming more in touch with health and wellness, the demand for cigarettes and other tobacco-related products has experienced a pushback. With Altria owning such meaningful market share, the rise in health-conscious purchasing activity has stifled the company's growth.
Image source: Getty Images.
What is Altria doing to combat this trend?
One of the most famous hedge fund managers in the world is Bill Ackman, CEO of Pershing Square Capital Management. Ackman is notorious for investing in a small cohort of stocks. And while he spreads these investments across different industries, one of the common denominators among his holdings is that he prefers owning companies that have pricing power.
During Altria's third-quarter earnings call, management spoke at length about the company's continuous price increases this year. Given the company's market-leading position, Altria has the luxury of being able to increase its prices while also not alienating its buyers. For this reason, higher prices have at least partially offset dwindling demand for tobacco products.
However, investors should be aware that Altria is doing more than just merely increasing its prices. The company has a history of doing acquisitions, and some of its latest transactions may shed some light on the future of the tobacco giant.
Earlier this year, Altria completed its acquisition of e-vape company NJOY Holdings. This deal isn't entirely surprising given prior deals in recent history that revolved around smokeless tobacco products. Back in 2019, the company invested in Swiss-based Burger Söhne Holding AG, which manufactures an oral nicotine pouch called on!.
Per Altria's third-quarter earnings, shipment volumes of on! increased 37% year over year. Meanwhile, its market share in retail increased from 5.2% in September 2022 to nearly 7%. These results could imply that Altria's moves in smokeless products are paying off. While traditional tobacco products such as cigarettes and cigars may continue to plateau as consumer sentiment shifts, the company has made some savvy investments in alternative categories that appear to be taking shape. Moreover, with NJOY vapes expected to be in 70,000 stores by year end, investors should not overlook the impact this can have on future earnings.
Is Altria stock undervalued?
The chart above illustrates Altria's stock price movement compared to a number of consumer staples exchange-traded funds (ETFs). The key takeaway here is that over the last year Altria stock has underperformed all three of the ETFs. With the stock trading near a 52-week low, some investors might be wondering if the sell-off is overblown and now is an opportunity to buy the dip.
While the secular trends impacting sentiment around tobacco products are hard to ignore, investors should keep in mind that Altria has made some interesting investments beyond smoking products that may not be priced into the stock. Moreover, the company's rich history of raising its dividend has earned Altria a position among the esteemed list of Dividend Kings -- something I don't see going away anytime soon.
MO PE Ratio data by YCharts.
Altria's current price-to-earnings (P/E) multiple of 8.4 is hovering around its lowest levels in three years. While the company's near-term growth may still be muted due to lingering pressures from inflation, the long-term picture appears more optimistic. Altria has a number of different ways to capture the attention of consumers as it makes inroads in new markets, namely smokeless tobacco and oral nicotine. Moreover, as the stock trades at dirt cheap levels, investors may want to consider Altria for some dividend income. Now looks like a terrific opportunity to go bargain hunting in Altria stock.
