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Light Up With Altria's Smoky Spinoff

Posted: Aug 22, 2008 09:53 AM by Matthew McCall

Tickers in this Article: BTI, ITY, MO, PM

In March 2008 Altria Group (NYSE:MO) spun off its old namesake, Philip Morris International (NYSE:PM), with the hope that the companies would realize their true value as two separately traded stocks. Altria would take the home-grown smokers, while Philip Morris focused on conquering the rest of the world.

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Since the move, Altria has struggled, yet Philip Morris sits just below an all-time high. So far it appears the true value of Altria was locked in the international tobacco business.

The Smoky Spinoff
Most spinoffs do not generate great results, just look at the show "Joey" that was a spinoff from "Friends". That is not the case with Philip Morris, if it were a sitcom the ratings would be through the roof. However, it would likely be on cable television due to its adults-only rating.

Philip Morris is the world's No.1 supplier of cigarettes to smokers around the globe. Its Marlboro brand is the top-selling cigarette in the world and the company supplies over 15% of all smokes outside of the U.S. And keep in mind that while smoking in the U.S. may not be the cool thing to do anymore, there are plenty of foreigners lighting up on a regular basis. (Learn how you can profit from mergers and corporate spinoffs in Cashing In On Corporate Restructuring.)

The official spinoff took place in March 2008 and Philip Morris began trading at $50 with a dividend yield over 3%. Within five months the stock was up 10% to $55, not including dividend payments. During the same time, Altria has fallen about 5% and the S&P 500 is down 4%. The reason for the outperformance is the dominance that Philip Morris has in the international cigarette market, and now that it is on its own, the stock can be fairly valued. As I mentioned earlier, cigarette smoking may be on the decline in the U.S., but that is not the story overseas and that is right in Philip Morris' wheelhouse.

Competitors
The international cigarette sector has seen some consolidation recently, but Philip Morris still has a few publicly traded competitors. In early August, Philip Morris has announced it will buy Canadian No.2 cigarette maker, Rothmans for nearly $2 billion.

The second largest tobacco company in the world behind Philip Morris is British American Tobacco (AMEX:BTI), the maker of brands such as Dunhill and Lucky Strike. Its products are sold in over 150 countries and overall the company sells over 300 different tobacco brands for its customers. The market cap of British American Tobacco is about half of that of Philip Morris, but sales only lag by about 12%. Fundamentally the five-year expected PEG ratio, which is a good measure for value, is nearly identical with Philip Morris at 1.25 and British American Tobacco at 1.18. British American also has a dividend yield of 2.5%.

The other direct competitor of Philip Morris that trades in the U.S. (until September) is Imperial Tobacco Group (NYSE:ITY), also based in the U.K. In September Imperial Tobacco plans on voluntarily delisting from the New York Stock Exchange. The company is the U.K.'s No.1 cigarette maker and has been growing internationally with a slew of acquisitions over the last two years. Performance-wise the two competitors (BA Tobacco and Imperial Tobacco) have done very well over the long-term, but struggled recently. Both stocks are down on the year at least double-digit percentages, but are now at attractive valuation levels. (To learn more, read The Dirt On Delisting.)

Moral Dilemma
When it comes to the tobacco stocks there are a number of investors that will never put money into the stock because of what the company does. There are others that simply want to make money. I completely respect both opinions, and I am not a smoker myself. Keep in mind the reason for this article is to inform you of the situation from an investment standpoint and you can decide on your own what to do with the information.

By Matthew McCall

Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.

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