This paper compares two contrasting stock investments — Altria (NYSE: MO) and Apple (Nasdaq: AAPL) — during the fall 2008 market downturn. The analysis examines each company's beta, revenue stream stability, dividend policy, sensitivity to economic conditions, and firm-specific risk factors. Despite Altria's non-cyclical tobacco business suggesting resilience, the stock underperformed due to looming excise tax increases and competitive pressures. Apple, though highly volatile and exposed to discretionary spending, outperformed on a risk-adjusted basis thanks to strong sales growth and a massive cash reserve. The paper concludes that firm-specific variables can override macroeconomic expectations in determining individual stock performance.
The paper demonstrates risk-adjusted performance analysis, applying beta-based expected return calculations to evaluate whether each stock's actual movement was explained by broad market forces or by company-specific variables. This technique — comparing expected decline (via beta) against actual decline — is a core method in equity analysis and shows how to move beyond raw price changes to draw meaningful investment conclusions.
The paper opens with a brief framing introduction, then devotes separate sections to each company: background, stock performance data, industry dynamics, economic sensitivity, and investment rationale. A shared conclusion synthesizes both cases, returning to the central thesis that firm-specific factors matter even during broad market downturns. References are listed in a Works Cited section following the conclusion.
For this stock analysis exercise, two companies with distinctly different characteristics were selected: Altria, the cigarette holding company, and Apple, the technology company. These firms differ substantially in terms of revenue stream stability, stock price volatility, sensitivity to economic conditions, dividend policy, and other key variables. This contrast was chosen deliberately to make for an illuminating comparison.
Over the study period, both companies lost value, as did the broader market. One of the most interesting outcomes, however, was that the results did not come in as expected. While overall market conditions brought both stocks down, there were significant performance differences attributable to firm-specific variables rather than macroeconomic forces alone.
Altria (NYSE: MO), the former Philip Morris, is a holding company that includes cigarette maker Philip Morris USA, cigar-maker John Middleton Inc., and a 28.6% interest in global brewing giant SABMiller. In the spring of the study year, Altria spun off Philip Morris International (NYSE: PM), which operates the Philip Morris tobacco business outside of the United States. Philip Morris USA holds around a 50% share of the U.S. cigarette market, while SABMiller is the nation's second-largest brewer. These strong market positions have enabled the company to maintain strong profitability over several decades, although both industries face challenges including global consolidation, increased regulation and taxation, and declining sales.
On October 28, 2008, 3,500 shares of MO were purchased at $19.53. As of December 5, 2008, those shares were worth $15.00, and had since rebounded slightly to $15.34. The cigarette industry is the primary driver for the company and is considered non-cyclical. Demand is relatively price inelastic. Because the tobacco industry is heavily regulated, the key driver of industry performance is government policy — including tax policy, advertising restrictions, sale restrictions, and other barriers erected to curb tobacco use.
The non-cyclical nature of the tobacco industry is reflected in Altria's low beta of 0.58. From October 28 to December 5, the stock price declined $4.53, or 23.1%. Over the same period, the S&P 500 dropped from 940.51 to 876.07, a decline of 64.44 points, or 6.85%. This indicates that Altria stock declined far more substantially than the overall market over that period. The firm's beta would have implied a decline of only 3.97%, which would have placed the stock at $18.75 on December 5. From this we can infer that the decline in Altria's stock was not simply a function of the general market decline, but was driven by firm-specific considerations as well.
The economic crisis itself was unlikely to have had a significant impact on Altria's core operations. Demand in the tobacco sector is relatively price inelastic, meaning that consumers who smoke do not view the habit as optional and do not significantly reduce consumption in the face of economic downturn. This is borne out by the performance of Philip Morris International stock, which Altria spun off to its shareholders. Shares of PMI were $41.55 on October 28 and $42.36 on December 5 — essentially flat, further confirming that tobacco demand held steady despite the broader market downturn.
The performance of the Altria Group can therefore be attributed largely to non-economic domestic factors. The threat of a federal excise tax hike in 2009 — expected to be in the range of 61 cents — is considered one of the reasons for the stock's underperformance, as it would reduce Philip Morris USA's ability to raise prices to cover cost increases. The company also faced pressure to increase advertising spending to staunch market share erosion in its premium brands, further hurting potential profitability (Reuters, 2008).
The tobacco industry as a whole is relatively unaffected by the current economic crisis. Some individuals may decrease consumption due to financial hardship, but overall this is unlikely to be a significant demand driver. The economic slump may, however, carry indirect consequences: with governments spending billions on sector bailouts and economic stimulus programs, tax revenues will inevitably decline as economic activity contracts. This has increased the probability of an excise tax hike, as governments move to offset funding shortfalls through so-called sin taxes.
The trickle-down impact on Philip Morris USA is expected to be a direct reflection of industry-wide impacts. The U.S. tobacco industry operates under near-oligopolistic conditions and heavy regulation, leaving little basis on which to differentiate among competing firms. Philip Morris has adopted neither a differentiated strategy nor a cost leadership strategy, and has therefore developed no meaningful insulation against industry-wide forces. What happens to the cigarette business as a whole largely happens to Philip Morris USA.
Altria's only insulation comes from its two other holdings: the John Middleton cigar business and its stake in SABMiller. John Middleton operates in the machine-manufactured cigar segment, a market closely related to cigarettes and subject to similar drivers. Employment, production, and income are all linked in the broader economic cycle — as employment increases, production rises, income grows, and firms expand. Over the study period, U.S. employment and production both declined, compressing national income. Cigarette consumption declines less sharply in response to falling income than many other consumer goods. Beer is more affected, though less so at the low end, where consumers trade down to products such as those made by SABMiller. The same dynamic holds for machine-made cigars. Thus, shifts in these three key economic variables have only limited impact on Altria, which is why its beta is so low.
If anything, John Middleton is more susceptible to economic downturns than the cigarette business, as consumers may trade down to ordinary cigarettes. The SABMiller stake is also more economically sensitive, given that demand for beer is more price elastic than demand for cigarettes. However, SABMiller can benefit from its low-end market position as consumers trade down from imports, partially offsetting losses from economic slowdown. Moreover, SABMiller derives a significant portion of its revenues from overseas markets, many of which had not yet been severely affected by the global slowdown at the time of the study.
Since the economy was not the primary reason for Altria's underperformance, an investor must look to other drivers to evaluate this security. The company operates in two heavily regulated, declining businesses characterized by intense rivalry that squeezes margins. One of the main benefits of owning a company like Altria is the theoretical steadiness of its income streams, a function of demand inelasticity. This steady revenue base produces a low beta, meaning that adding Altria to a portfolio would reduce overall portfolio risk. However, inelastic demand also creates a problem: governments exploit it by levying excise taxes, which limits tobacco companies' ability to raise prices in response to rising input costs. In an industry already losing customers due to health concerns, reduced margins significantly impair profitability.
The primary reason to own Altria is its dividend. The annual dividend of $1.28 produces a dividend yield of 8.34%. Given that Altria's earnings per share (EPS) stood at only $1.54, it is clear the company pays out the vast majority of its profits to shareholders. Despite the challenging operating environment, Altria is well-positioned to maintain relatively stable revenue streams sufficient to sustain this dividend. As a result, the stock is better suited for long-term income investors than for those seeking capital gains. Altria's slow growth, difficult operating environment, and limited upside make it a poor choice for investors seeking anything beyond a relatively stable income stream.
Apple (Nasdaq: AAPL) designs, manufactures, and markets computers and related hardware and software. The company's product lineup includes desktop computers, laptop computers, portable music players (iPod), portable communications devices (iPhone), and the software packages to support these devices. Apple is vertically integrated, selling through channels it controls — its website and its own retail stores. The company also markets servers, storage devices, and third-party hardware compatible with Apple products. In music, Apple operates both the iPod hardware and the iTunes platform, which serves as both an operating system for Apple devices and an online music store. The firm also markets a wide range of third-party peripheral products.
Apple competes with Microsoft in software and servers, and with hardware manufacturers such as IBM, Hewlett-Packard, Compaq, and Lenovo. In music and portable communications, competitors range from Sony to Research in Motion to Motorola. Each of these industries is driven by technological improvements and shifts in consumer tastes. Apple has sought to counter the risks to its revenue streams by fostering strong brand loyalty, though it remains a smaller competitor in most markets except portable music, where it dominates.
One thousand shares of Apple were purchased on October 28 for $99.91. As of December 5, those shares closed at $94.00, and had since rebounded to $98.27, with most of that recovery coming on December 12. Apple shares therefore lost $5.91 between October 28 and December 5, a percentage loss of 5.91%. Over the same period, the S&P 500 lost 6.85%. Apple carries a beta of 2.07, indicating that its stock price is roughly twice as volatile as the overall market. Using that beta as a predictor, Apple shares should have dropped 14.17%, to approximately $85.75. Apple therefore significantly outperformed its expected decline over the study period, despite the slumping economy.
Enthusiasm about this outperformance should, however, be tempered by context. Apple stock had seen a massive decline prior to the October 28 purchase date — the company was trading at $179 in August, meaning over 40% of its value had already been lost before the study began. Furthermore, the stock's volatility did not diminish during the study period; Apple shares ranged from $104.55 to $80.49, and the fact that the stock ended the period near where it started does not indicate stability.
The economic crisis had strongly affected Apple's stock valuation, even if not yet its revenues. The company markets to both consumers and corporations, and both markets were curtailing spending. The computer industry is especially vulnerable to downturns because firms can extend the useful life of existing equipment when budgets are tight. It is worth noting that Apple's stock decline had occurred mainly on fears of future revenue reductions — stock prices are considered a leading indicator, and investors had clearly priced in concerns about Apple's economic exposure.
As of the study period, however, the actual impact of the economic slowdown had yet to materialize. Apple grew Q4 sales 26.9% year-over-year and maintained consistent gross and net margins throughout 2008 — something many firms had failed to do. This apparent insulation from the financial crisis had not fully translated to stock market success, but the modest 5.91% decline was consistent with a company weathering the storm. Given the high volatility of Apple's share price over the period, however, that conclusion cannot be drawn with confidence.
Both Altria and Apple lost value over the study period. However, the similarities end there. Given the relative volatility of the two companies, it is evident that Apple significantly outperformed over the period on a risk-adjusted basis while Altria underperformed on a risk-adjusted basis. In fact, the results were the reverse of what theory would have predicted. Altria, with its non-cyclical revenue streams, should have held up better in a deteriorating economy. Apple, with its dependence on discretionary consumer and corporate spending, should have fared worse.
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