Wells Fargo: Altria Stock Is Extremely Cheap

Altria Group Inc MO stock is down more than 15 percent in the last month as concerns over a potential U.S. ban on menthol cigarettes weigh on investor sentiment. One Wall Street analyst said value investors have a rare opportunity to buy Altria following the sell-off.

The Analyst

Wells Fargo analyst Bonnie Herzog reiterated an Outperform rating on Altria and lowered the price target from $75 to $65.

The Thesis

Altria shares are trading at their lowest valuation in the past five years, Herzog said in a Monday note. (See her track record here.)

The sell-off has pushed Altria’s dividend yield to an impressive 6 percent, the analyst said.

On Nov. 15, FDA head and cancer survivor Scott Gottlieb announced new restrictions on flavored vaping products. Gottlieb got tobacco investors’ attention by also proposing an outright ban on menthol cigarettes, which represent about 35 percent of total U.S. cigarette sales.

While the announcement spooked the market, Herzog said Monday that the potential crackdown may not be as bad as it seems for Altria.

“The FDA’s recent decision to restrict e-cig flavors and pursue menthol cig/cigar bans, while broadly concerning, doesn’t materially impact near-term trends and importantly, the e-cig flavor regulations could actually benefit MO on a relative basis considering JUUL has the most to lose."

British American Tobacco PLC BTI would potentially take the biggest hit from a menthol ban, with about 55 percent of its U.S. volume coming from menthol sales, Herzog said. About 21 percent of Altria’s North American volume and 20 percent of Imperial Tobacco Group plc IMBBY volume comes from menthols, she said.

Height Securities recently estimated that the soonest a potential menthol cigarette ban could be enacted is late 2020.