Special Situation Investing

Thursday, February 01, 2007

Altria Group (MO) - A few more things

I've been thinking fairly obsessively about the Altria Group (MO) spinoff of Kraft (KFT). This isn't a fully fleshed out post but I wanted to pass on a few things..

1) Excluding Kraft, MO's earnings last fiscal year (ended just a few days ago) and the year to come are as follows:

... Excluding Kraft's contribution in 2006, which came in 2 cents per share higher than we had projected, and excluding certain items, Altria's adjusted EPS last year was $4.05. This year, the company expects earnings from continuing operations, including charges of 8 cents per share, to reach $4.15-4.20 per share, good for about 5% earnings growth. This figure, which is based on constant currency rates, isn't comparable to analyst EPS estimates of $5.62.

Consider that .7 shares of KFT will be distributed for each share of MO. At $34 a pop, this indicates $24 of MO's value is for KFT. Excluding that amount, gives up a per share value of post-KFT MO at $63.50. If earnings come in as expected, you are looking at a P/E of ~15.3. Not bad for a non-cyclical stock with incredible margins.

2) Kraft may receive better debt ratings from Fitch Rating and S&P by removing it's linkage to MO.

Fitch said the removal of Kraft from Altria's umbrella will allow the service to rate the food maker based on its own merits and will not be dragged down by the litigation risk carried by Altria

3) This may be just the start of the special situations at MO.

Next, analysts expect the New York-based company could split its domestic and international tobacco divisions later this year.

Norton believes that could be followed by "monster stock buybacks" worth as much as $40 billion.

"The important thing to bear in mind in our view is that this is really just the beginning of a process from Altria to increase shareholder value," Norton said.

4) Found a reference here to the cost impact to Kraft of lost synergies:

These costs include taxes and shared services, as Altria has been providing some of Kraft's information-technology needs," the analyst wrote. "We guess these incremental costs, which are likely to continue for years, may total 10 cents to 15 cents a share."

So is it a buy? Which one is a buy? Are these good candidates for options? These are all things I am debating right now, all opinions are welcome.

I wrote another post about the spinoff a few days ago here.


  • I just wanted to let you know that I have been enjoying reading your posts for the last few months.

    By Anonymous Anonymous, at 2:27 PM  

  • Now, I am FAR from an expert, but I think that MO is still a buy at this point.

    First, I originally bought MO right after news broke of the class-action certification in the "light" case. Investors get shaken when they hear news like this and The Street still does not fully realize how baseless this case is. Accordingly, the stock is a bit undervalued at this point still.

    Second, I think that MO's earnings are going to be sought after post-spinoff. They are expanding and doing well, their exposure makes them immune to a cooling US economy/higher tax rates, and they will probably be more efficient w/o KFT using certain resources.

    My prediction is that they stock will not drop below $63.50 post-spinoff, and I'm probably unloading my position if it starts to tear towards $70 based on excitement on Wall Street.

    By Blogger Dan Levy, at 8:38 AM  

  • My math suggests a $68.50 share price for Altria ( ex. KFT ) based on a dividend rate of 4%.
    KFT is viewed as weak, but it has excellent franchises that have suffered under PM mgmt. and the original Kraft Mrmt.. MS. Rosenfeld can rebuild this company overtime via focusing on consumer packaged foods fundamentals.

    By Anonymous Anonymous, at 8:40 AM  

  • Kraft might be the undervalued play. You have a short term effect of over-supply of stock which will depress the stock price. A similar situation to the one we have spoken about before. I temporary market inefficiency that will create a buying opportunity.

    buy kraft after the dip and hold for the long term.

    By Anonymous Adam, at 1:37 AM  

  • I agree that Kraft may become a buying opportunity if there is a dip. Unfortunately that hasn't happened yet. The thing is, again, because of hedge funds and the general massive amount of funds out there right now, the dip may not happen.

    I have been following spinoff's for awhile, and I'm telling you, in general you just don't see much of a dip unless the thing is price absurdly. I could be wrong, and I will definitely watch Kraft around the spinoff, but I doubt you will see a big move (more than 5%) in the days surrounding the spin.

    By Blogger spinoff, at 3:50 PM  

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