בס״ד

Our Forefathers, Mo and Sam, Enjoyed the Occasional Beer (MO/SAM)

Posted on May 3, 2020

Today’s trade is a vice play.

Beer and cigarettes.

And it pairs two bigwigs in the field of sin, Altria Group (NYSE:MO) – merchants of all things smoke-related (along with Miller Beer) – and The Boston Beer Co. (NYSE:SAM), pushers of Sam Adams Ale and Lager.

Our interest in the trade stems from the current lockdown situation and how people’s taste for all things evil and corrupt has fared during the period.

And we open with this –

  • Restaurants and bars are still closed, though that’s slowly changing.
  • Whether folks herd back into pubs and brasseries for a cold one when given the chance is an open question.  Our best guess is it’ll take some time.  Maybe a long time.
  • Universities and colleges are closed. No keg parties until fall.  If then.
  • Then there’s discretionary cash. Does anybody have any?  And if so, will it go to booze and cigarettes?
  • Hard to say, but again, we’d hazard that it’s less than likely considering the current uncertainty – cigarettes may be the better bet, though, given the addiction element and the cost of a single pack vs. a full night on the town.

That said, which companies are well placed and which not?  And how might a clever chap avail himself a few extra extra banknotes via a well structured options trade?

We have an idea.

Altria, mentioned at the outset, just got a reputable stamp of approval on Friday from Moody’s Investor Service, when it affirmed MO’s A3 credit rating and bumped up its outlook from negative to stable.  Moody’s also praised the company for its extensive belt-tightening initiative that shaved $600 million off costs over the last year.

As to the current period, Moody’s wrote –

The coronavirus outbreak will not have a material impact on the company, though a prolonged recession in the US or potential supply chain disruptions would lead to modest earnings declines. Thus far, the company has maintained stable demand throughout the shutdown period and has not experienced any material disruptions in manufacturing or supply chain.

That’s Moody’s.

Add to that, the company’s massive and increasingly profitable stakes in Canadian cannabis company Cronos Group and e-cigarette criminals Juul Labs, and you can understand how MO recently beat analysts’ profit estimates by better than 10% ($1.09 instead of $0.98).

Revenues also came in at a better than expected $6.36 billion, atop forecasts of just $4.3 billion.

Altria claimed demand for all products surged in the first quarter.

After all, what’s a guy to do all day in these troubled times!?

MO stock trades with an 8.86% yield and a forward P/E of 8.24.  Price to Book is a bit tipsy at 11.35.

Overall, though, not bad numbers.

And What About the Competition?

Juxtapose those fundamentals against SAM’s, and you begin to see a difference.

SAM trades with a P/E of

With kind regards,

Hugh L. O’Haynew

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