The fiscal year 2019 was challenging for Altria Group (NYSE:MO), as the company reported impairment charges related to its investment in e-cigarette company Juul. MO stock started recovering in fiscal year 2020. But the spread of the coronavirus from China stalled the bounce back, which triggered a broad market plunge and the stock declined sharply.

With Altria touching making new 52-week lows, consider gradual accumulation here. Going straight to valuations, Altria expects current year earnings per share (EPS) to be between $4.39 and $4.51. Considering the current stock price of $39.20, the company is trading at a forward price-earnings (P/E) ratio of 9.81 This is the lowest P/E ratio for Altria in a decade and the stock is certainly undervalued.

Furthermore, Altria expects EPS growth of 4% to 7% between FY2020 and FY2022. So with growth visibility and a dividend yield of 9.23%, Altria is too attractive to ignore.

I must add that the company has a strong balance sheet with a leverage of 2.30. With the company generating over $1 billion in annual cash flows, in excess of dividend payments, there is no credit stress.

Therefore, the valuation factor coupled with the company’s growth plans, makes the MO stock worth considering.

Non-Combustible Products Can Drive Growth

According to Altria, tobacco volumes have declined at an average of 0.9% in the last five years. The decline in cigarette has been more significant with smoking among U.S. citizens hitting an all-time low.

To maintain growth, Altria is looking at expanding its portfolio of non-combustible products.

As an example, the company’s IQOS Heating is already commercialized in the Georgia and Virginia. IQOS is the only Food and Drug Administration authorized heated tobacco system, which gives Altria a first-mover advantage.

Similarly, “on!” is an oral nicotine product that is available in 15,000 stores nationally. The company will further expand manufacturing and distribution in the current year. And by the end of FY2020, the Richmond Manufacturing Center will have a capacity to produce 75 million cans. Given the capacity expansion, Altria seems optimistic.

Overall, Altria expects to continue expansion of non-combustible product portfolio through FDA authorized products.

Moreover, the U.S. has announced a countrywide ban on flavored e-cigarette. However, according to the FDA, “Manufacturers that wish to market any ENDS product – including flavored e-cigarettes or e-liquids – are required by law to submit an application to the FDA that demonstrates that the product meets the applicable standard in the law.”

This provides hopes for Juul, as it’s likely that e-cigarettes are back in the market in the next 12-24 months.

I am therefore positive on the company’s non-combustible product portfolio growth. This should ensure earnings growth meets the company’s guidance in the coming years.

Positive on Exposure to Cronos

In December 2018, Altria purchased 45% stake in Cronos Group (NASDAQ:CRON) for a consideration of $1.8 billion. Considering the fact the Cronos stock has plunged, though, the stake is currently valued at only $855 million.

However, there are reasons to be bullish on the cannabis industry in the long-term. The industry is likely to be worth $73.6 billion by 2027.

It’s also true that research gaps in medicinal cannabis have translated into sluggish growth for companies, and regulatory headwinds have also contributed to cannabis stocks nose-diving. However, Altria can back Cronos and the latter can invest in clinical research. Therefore, an extended period of cash burn is not a concern.

So once the cannabis industry reaches inflection point, Altria is likely to benefit from the stake in Cronos.

My Final Thoughts on MO Stock

MO stock is a quality dividend stock with an investment grade rating. Even with the recent headwinds related to Juul, the stock is an attractive investment.

With diversification into non-combustible products, the company’s earnings growth is likely to ensure that cash flows remain robust. In addition, stake in Cronos can be rewarding in the next five years.

With the stock trading at its lowest P/E ratio in a decade, consider accumulation at current levels. However, considering the market correction, gradual accumulation is advisable than a big plunge in the stock.

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