Tag: MO

Dow Chemical (DOW): Looking Back To See The Future

Post author By ToddSullivan
Post date April 3, 2007

I had promised to break down and comment further on Dow Chemical’s (DOW) CEO Andrew Liveris’s letter to shareholders a week ago and now that the Altria spin is over and I have been able to clear out my inbox with Altria (MO) related emails, it’s time to comment. These letters are very important if for no other reason it allows us to discern what is important to the person at the top and, are they managing the company in a way that directs it towards them. I read these for the same reason I read the Earning Call Transcripts on Seeking Alpha, numbers only tell you so much. Because of this, I will dispense with most of the sales and revenue numbers and deal with what is important to us. This is a great letter because he first reviews the goals he set in 2006, updates his progress towards them and then after proving that he is good to his word, lays out the future for Dow.

When I bought and recommended Dow I did so because they were doing 3 key (among other) very shareholder friendly things: increasing dividend, decreasing debt, share buybacks.

From the Letter:
“We reduced debt by $1.2 billion, lowering our Company’s debt-to-capital ratio from 39% in 2005 to 34% by year-end 2006. Today, our Company’s financial position is as strong as it has ever been. We also raised our dividend by 12% and repurchased more than 18 million shares, and our repurchase program is continuing. In October, we announced an additional $2 billion share buy-back program.”So far Liveris is delivering on his fiscal goals and the additional share repurchases show this will not subside in 2007. Now let’s look at some of the goals he set for the various businesses in 2006 and see what progress was made. From the letter:

Setting Public Goals
Early in 2006, we put some public stakes in the ground regarding our future plans. We said then that we would remain a diversified, integrated, global company, and we think our 2006 results bear out the wisdom of that statement. To bolster our Performance portfolio, we said we would launch two to four more market-facing businesses—businesses that focus on our most promising markets and bring the full power of our Company’s capabilities to them. We also said that we would make bolt-on acquisitions to support them. With that in mind, let’s examine what we did in our Performance portfolio.

We launched our new Dow Water Solutions market-facing unit, which offers world-class brands and technologies to the water treatment industry. With Dow’s existing technologies and the July acquisition of Zhejiang Omex Environmental Engineering in China, this platform advances our capabilities in desalination, water purification, contaminant removal and water recycling.
We also started up a new plant in the United States for the production of FILMTECTM membranes, substantially increasing the production capacity of our reverse osmosis membranes used in water treatment.
In Dow AgroSciences, we doubled capacity for our canola and sunflower oil seeds, affirming our growth strategy in the healthy oils sector.
In our Building Solutions unit, we expanded our capacity to produce
STYROFOAMTM brand insulation, and we added a new composite product for decking that is superior to wood in durability and maintenance.
In Greater China—where our sales increased from $2.3 billion to $2.7billion—we committed to the construction of a new glycol ethers plant, as well as a $200 million investment in our epoxy business for new manufacturing capacity and a new epoxy R&D center. And we began construction of our major new technology center in Shanghai.
In our Water Soluble Polymers business, we launched a new line of dietaryfiber products that help combat the problems of excessive blood glucose,cholesterol and insulin, as well as obesity. We also announced the planned acquisition of Bayer’s cellulosics business, which would increase the sales of our Water Soluble Polymers business by more than 60 percent to roughly $1 billion a year.With the Basics portfolio, as with our Performance portfolio, we will continue to take aggressive action throughout 2007, including new business models that will make our Basics portfolio more “asset light” and more competitive for the long term.

Revitalizing Innovation
Dow has a long history of strong innovation, and in 2006 we added some exciting new chapters to our story. And here let me note that we have been silent for a few years in order to avoid the trap of “overpromising and underdelivering.” So, rather than focusing on a handful of rifleshot projects, we announced that we are funding more than 600 projects that either strengthen our position in key franchises or break into entirely new areas of technology. These projects have a potential yield of $2 billion in additional EBIT by 2011. We intend to talk about all of these projects as they approach commercialization, and we will explain them in the context of broad themes. Three themes we launched in 2006 include:

In alternative feedstocks, we are pursuing the use of methane as a raw material to manufacture basic building blocks like ethylene and propyleneand to use natural oils, from soybeans for example, as raw materials for polyolplastics. Done on a broad scale, these alternative raw materials would significantly reduce the cost of our feedstocks.
In healthcare and nutrition, we are concentrating on projects such as Dow Agro Sciences’ healthy oils, and a new ingredient delivery system for medicines that uses water-soluble films.
In building and construction, with its renewed emphasis on energy conservation and a focus on eco-friendly building materials, we are working on projects ranging from the elimination of ozone-depleting blowing agents used in the manufacture of STYROFOAMTM brand insulation to new roofing systems that harness the sun’s energy at a much greater rate than current technology allows.

As I mentioned at the beginning of this letter, the surest method to increase the value of our Company to you, our investors, is to change our earnings profile. And to do that, we must draw a greater proportion of our earnings from Performance businesses.So going forward, you can expect more of what you saw in 2006

More innovation
More market-facing businesses,
More asset-light joint ventures,
Continued financial strength and flexibility,

Finally Liveris writes:
“…we believe 2007 will be even more significant. We will continue to take action to transform the profile of our Company’s portfolio in order to change the profile of our earnings, including both strong growth (which we have historically achieved) and greater consistency (which, as a cyclical company, we have not).

The letter illustrates that Liveris is intent on moving Dow heavily into areas that demonstrate huge growth potential. If you have watched the news lately, several themes have been a constant:

Water, while plentiful in the US, is needed desperately in the rest of the world. Dow Water Solution has the inside edge and is addressing this need in China. This is severely overlooked by the mainstream media when talking about Dow.
Raw material costs. Dow is addressing this issue by finding and using bio solutions for production (natural oils in place of petroleum)
Asset-light ventures. These are the key. Why? It involves less investment which has the immediate effect of keeping debt levels low and increasing cash available for either further investment or being returned to shareholders. Another oft overlooked key is that these ventures allow both parties to maximize the strengths of each other. For instance, a new chemical plant in India allows Dow to take advantage of a much lower cost structure and the relations that the local company has in India to reduce production inputs while at the same time giving the Indian company access to Dow’s vast and experienced sales network and technical expertise. A win -win.
China, China, China. Dow has several very large projects there for chemicals that will directly address China’s ability to continue to grow, demand here will be huge.

Based on emails I have have been getting recently I was anticipating something to be announced by now. I would be VERY surprised if a major announcement was not made before April has ended and no, it will not involve a sale of the company. Assets, maybe, the whole company, no.

In this era of shareholder distrust of management, we shareholders of Dow are fortunate not to have that worry. Liveris has not done anything that should make us doubt his word or the direction he is taking the company. 1st quarter earnings will be webcast 4/26. I for one cannot wait.

When he says “2007 will be a significant year”, I believe him. You should to.

Tags dow, MO

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Altria (MO) : Spin Day and It’s Effect

Post author By ToddSullivan
Post date April 2, 2007

So the much awaited and talked about the spin became official Friday and this morning both Kraft (KFT) and Altria (MO) began trading on their own. Lets take a look at the immediate effect on our holdings today.

As I stated in a earlier post, I advised MO holders to dump Kraft shares and purchase additional Altria shares. Let’s tale a look at the math to see how the spin has affect us. I will use the ValuePlays Portfolio to illustrate the effect. In the portfolio we have a purchase price of $88.06 per share. Now, as I have said before I have owned Altria shares for years but since I only started the blog in January and have no way of proving to you my true purchase price, my first post on the subject will have to be our purchase price. Based on the advice in my earlier post I immediately sold the Kraft and bough more Altria

This morning we got .69 shares of Kraft for each share of Altria we own. For simplicity sake, I am going to assume we only own 1 share. For this example in order to keep it as simple as possible and not get into partial shares and weighted average purchase price, I am going to assume we just sold our Kraft shares and are keeping the money in our account for now. Here is how it worked out.

Original Purchase Price of Altria: $88.06
Fridays Altria Closing Price: $87.81
Pre-spin Results: -.25 or .2%

Money received from sale of Kraft shares: $21.79 ($31.58 price X .69 shares)
New Adjusted Purchase Price of Altria: $66.27 ($88.06 – $21.79)

Current Altria Price: $67.80 (12 pm)
Post Spin Results: + $1.53 or +2.3%

Essentially, by dumping the Kraft shares that are down over 3% today at the open (which was also their high for the day) we have turned our investment in Altria from being just under water to up over 2%. Also, in 11 days we also get a dividend from Altria of 86 cents that at current prices adds another 1.3% to our gains. See Altria dividend information here.

Please do not get greedy and take these quick gains and run with the money. Hold your Altria shares because there is much more to come that will make you much more money in the end.

Tags MO

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ValuePlays Portfolio- Update

Post author By ToddSullivan
Post date March 31, 2007

Q1- 2007 (since 1/18/2007)

ValuePlays= +5.1%
S&P = -.6%

I have written about quite a few stocks here and have been asked by readers, “do you own all these stocks”? Well, no. I have put together an “Official Value Plays Portfolio” so you can track my suggestions and in turn, measure my results against others and the market as a whole. Just so everyone understands what the following chart means and how I am going to measure the results, here are the ground rules:

1- The “buy price” is the price the day I email Enhanced Features Members a “Trade Alert” that says “buy”. A post suggesting the same will hit the blog several days later giving EF Members ample time to buy ahead of others. Even though I have owned several of these picks for years, I cannot prove this to you so the date of the email will now be the “buy price”. For stocks we advise you avoid, we will track those by the price per share the day I recommend you avoid them.

2- Dividends, splits or spin offs will be treated as a reduction in the purchase price to show the “true return” on the investment. For example, I buy a stock for $20 and it pays a 25 cent quarterly dividend. Each quarter I will reflect that payment (gain) buy reducing our purchase price by 25 cents. That reduction will be noted in the “actual cost” category. This will be the same for the upcoming Kraft spin off by Altria, I will reflect the investment gain of the Kraft shares we receive (since I will not keep them) by reducing my purchase price for the Altria shares by the value of the Kraft shares. Should I change my mind and keep the shares, this will be reflected by a decrease in the purchase price of the Altria shares to reflect the gain and then a purchase of the Kraft shares in the same amount.These situations will be footnoted for individual explanation.

3- Should I recommend the purchase of additional shares of a security, that will be reflected by another entry for that security and that price (to assure consistency with the new post).

4- I update comments on results weekly to Enhanced Features Members and provide them more detailed information about the stocks in the portfolio (weekly and quartely #’s by their requests). The blog will receive periodic updates on securities. Since I am “long term” oriented, I will not break out results quarterly or annually on the blog. If you have read my posts, the conditions that will trigger a security to be sold will not be a temporary drop in the stock price, so monthly and quarterly results are essentially irrelevant. I have found that the shorter I make the tracking time frame of an investment, the more likely people are to make decisions based on short term events and not long term fundamentals. This is counter to my philosophy, so to help prevent that, all results will be “from inception”. By default since this is new, the initial results must be short term but as time goes on this will change. The benchmark I will use for comparison will be the S&P 500. It also will be tracked from the inception of my first post 1/18/2007.

5- I will rarely if ever “short” stocks (sell them first in the hopes of buying them back at a later date at a lower price). I will track the results of stocks I advise you avoid again in the interest of full disclosure and honesty.

6- I may engage in some options purchases or sales. If I do these will also be reflected on the tracking.

7- Portfolio assumes an equal weighting of shares for each security. By default this means I have more dollars invested in higher priced stocks like MO, and SHLD. I am very comfortable with this. Again, should we want to add additional shares of a security, we will note that by another entry.

8- Updates are current prices (20 min delay) through Google Finance.

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Altria Spin-Off of Kraft: Q & A

Post author By ToddSullivan
Post date March 26, 2007
3 Comments on Altria Spin-Off of Kraft: Q & A

Altria Letter to shareholders

QUESTIONS AND ANSWERS REGARDING THE SPIN-OFF OF KRAFT FOODS INC.

1. I own Altria shares. What will I receive as a result of the spin-off?
Altria will distribute 0.692024 of a share of Kraft Class A common stock for each share of Altria common stock outstanding as of the Record Date for the Distribution, subject to adjustment as provided herein. The distribution ratio is based on the number of Kraft shares owned by Altria divided by the Altria shares outstanding on that date.

2. What do I need to do to receive my Kraft shares?
No action is required by Altria’s shareholders to receive their Kraft Class A common stock. The Distribution of Kraft’s outstanding shares owned by Altria will be made on the Distribution Date.

3. What is the Record Date for the Distribution, and when will the Distribution occur?
The Record Date is March 16, 2007, and ownership is determined as of 5:00 p.m. Eastern Time on that date. Shares of Kraft Class A common stock will be distributed on March 30, 2007. We refer to this date as the Distribution Date.

4. What do I have to do to participate in the Distribution?
You will receive 0.692024 of a share of Kraft Class A common stock for each share of Altria common stock held as of the Record Date, subject to adjustment as provided herein. You may also participate in the Distribution if you purchase Altria common stock in the “regular way” market and retain your Altria shares through the Distribution Date.

5. If I sell my shares of Altria common stock before the Distribution Date, will I still be entitled to receive Kraft shares in the Distribution?
If you sell your shares of Altria common stock prior to or on the Distribution Date, you may also be selling your right to receive shares of Kraft Class A common stock. You are encouraged to consult with your financial advisor regarding the specific implications of selling your Altria common stock prior to or on the Distribution Date.

6. How will the spin-off affect the number of shares of Altria I currently hold?
The number of shares of Altria held by a shareholder will be unchanged. On the Distribution Date, Altria’s shareholders will receive 0.692024 of a share of Kraft Class A common stock for each share of Altria common stock that they own, subject to adjustment as provided herein. The market value of each Altria share, however, will adjust to reflect the spin-off and, hence, the loss of the valueof the Kraft stock.

7. What are the tax consequences of the Distribution to Altria shareholders?
Altria has received an opinion from outside legal counsel to the effect that the Distribution will be tax free to its shareholders for U.S. federal income tax purposes, except for any cash received in lieu of a fractional share of Kraft Class A common stock. You should consult your own tax advisor regarding the particular consequences of the Distribution to you, including the applicability and effect of any U.S. federal, state and local and foreign tax laws. Altria will provide its U.S. shareholders with information to enable them to compute their tax basis in both Altria and Kraft shares. This information will be posted on Altria’s website,
www.altria.com/Kraftspinoff, on or around March 30, 2007.

8. When will I receive my Kraft shares? Will I receive a stock certificate for Kraft shares distributed as a result of the spin-off?
Registered holders of Altria common stock who are entitled to receive the Distribution will receive a book-entry account statement reflecting their ownership of Kraft Class A common stock. For additional information, registered shareholders in the U.S. and Canada should contact Altria’s transfer agent, Computershare Trust Company, at 1-866-538-5172 or by e-mail at altria@computershare.com. Shareholders from outside the U.S. and Canada may call 1-781-575-3572. If you would like to receive physical certificates evidencing your Kraft shares, please contact Kraft’s transfer agent. See “Kraft Transfer Agent and Registrar,” on page 8.

9. What if I hold my shares through a broker, bank or other nominee?
Altria shareholders who hold their shares through a broker, bank or other nominee will have their brokerage account credited with Kraft Class A common stock. For additional information, those shareholders should contact their broker or bank directly. Questions regarding the Distribution can also be directed to our information agent, D.F. King & Co., Inc., at 1-800-290-6431.

10. What if I have stock certificates reflecting my shares of Altria common stock? Should I send them to the transfer agent or to Altria?
No, you should not send your stock certificates to the transfer agent or to Altria. You should retain your Altria stock certificates. No certificates representing your shares of Kraft Class A common stock will be mailed to you. Kraft Class A common stock will be issued as uncertificated shares registered in book-entry form through the direct registration system.

11. If I was enrolled in an Altria dividend reinvestment plan, will I automatically be enrolled in the Kraft dividend reinvestment plan?
Yes. If you elected to have your Altria cash dividends applied toward the purchase of additional Altria shares, the Kraft shares you receive in the Distribution will be automatically enrolled in the Kraft Direct Stock Purchase and Dividend Reinvestment Plan sponsored by Computershare Trust Company (Kraft’s transfer agent and registrar), unless you notify Computershare that you do not want to reinvest any Kraft cash dividends in additional Kraft shares. Contact information for the Kraft plan sponsor (Computershare) is provided on page 8 of this Information Statement. Additional frequently asked questions and other information are available at www.altria.com/Kraftspinoff.

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Total Return Yield – A Measure Of Value

Post author By ToddSullivan
Post date February 23, 2007
8 Comments on Total Return Yield – A Measure Of Value

In order to help me determine the value of a purchase I use something I call the Total Return Yield (TRY). It simply tells me what I am getting in return from the company for my purchase price. For me, it is a gauge of value, the higher the rate, the more I am getting for each dollar I invest. I do not know if this is used under another name by anyone else but it is working for me.

Currently, the common measurement of this metric is what is called the Earnings Yield (EY). It is simple to determine and is just the reverse of the PE ratio. Rather than dividing the price by the earnings, to get the EY we divide the earning by the price. That tells us the return in earnings for each dollar we invest. An example: We purchase a stock for $10 that earns $1 a year. The PE ration is 10 ($10 /$1), that means we are paying ten times the earnings per share for each share. The EY is 10% ($1/ $10). It tell us that for each dollar we pay, this stock will return 10% to us in earnings. This is a good gauge but I feel totally inadequate. Why?

In a word, dividends. Let’s look closer. What are dividends? They are monies paid from retained earnings (money in the bank) to shareholders. Isn’t this a return to us? What the company is essentially saying is “our business requires “x” dollars to function and grow but our earnings are large enough where we have “x plus” in the bank so here you go, as an owner, take some”. Again, we have to look at the purchase of a share of stock as a purchase of the whole company. If we bought the whole company, we would receive all the money in the bank (retained earnings). All dividends are is a partial payment of that to us for buying part of the company. When I figure my Total Return Yield (TRY), I take the EPS (earnings per share) and add the dividends per share to it then divide by share price.

The argument from accountants will be that dividends are paid from earnings that do not need to be reinvested in the company so to count them again is in essence “double counting” them which will artificially inflate my return. That argument is technically correct by accounting standards but not correct for our uses (let’s not get stuck on that point gang, these are the same people who did not classify stock options to as an expense to the company, yeah..employee compensation was not an expense?). Here is why I claim it is incorrect to make their assumption: If we were buying the whole company and going to value it, part of our valuation would include a value of the money in the bank (retained earnings). So if we are to believe the accountants argument, because we are only buying a portion of the company we should not value the return of that money in the bank (dividends) to us? The way retained earnings (money in the bank) are treated for accounting purposes does not quantify what years earnings they represent. Why does this matter? Let’s assume I buy stock in a company that earns $1 a share and pays me a $1 dividend. The next year I own it, earnings drop to $0 for whatever reason but they still pay me my $1 dividend. Where did the $ come from? Prior years earnings. The point here is that when you buy a stock that pays a dividend you are also buying a claim to unused portions of prior years earnings that are paid to you in the form of that dividend. We must include that value in our return. This process does admittedly favor dividend paying stock so we need to look close at that:

There are only 3 reasons a company will not pay a dividend and two are bad:

1- No money available (bad business losing $$)
2- The business requires so much money to grow, innovate and maintain market share it needs to re-invest almost all of the earnings, leaving none for dividends (think most tech companies)
3- The managers are able to earn such a far superior return on the retained earnings that it is in the shareholders best interest for them to keep and invest it (Rare: think Warren Buffet and Eddie Lampert (SHLD).

Those companies that pay dividends are in the types of businesses that generate profits in excess to what is needed to both maintain and grow the business. They return a portion of the excess to us, the owners and keep some “for a rainy day”. These are businesses we want to be looking at more closely as they are more likely to have durable competitive advantages than those who do not. Now of course this is not a “all of them” scenario but with thousands of stock to look at, this helps us begin to narrow the search.

Let’s do a real life comparison. We have $1000 dollars and want to invest it. We are looking at Value Plays Portfolio pick Altria (MO) and we will compare it to Starbucks (SBUX). For our $1000 we can buy 11.7 shares of MO or 30.1 shares of SBUX at current prices. The question is now, what do we get for the money we spent? After one year, in MO we get $66.80 in earnings and $40.25 in dividends for a total of $107.05 or a TRY (total return yield) of 10.75% ($10.75 / $1000). In SBUX we get $21.93 in earnings and no dividends for a TRY of 2.2%. Which company presents a better value to you? MO of course. Now the argument for SBUX will be that the company is growing faster so the stock price will appreciate more and SBUX owners will see more profits. Consider this though, in order for SBUX holders to make up the difference, their shares need to appreciate $2.85 each or 8.7% more than MO shares to make up the difference. “Big deal, only 8%” you say? It is when you consider since the beginning of 2005 MO shares are up 40% and SBUX shares just 12%.

Were does this leave us? This cannot be used as a “be all end all” tool. It does not take into account the future growth of the business and what you are paying relative to that growth. It gives us a snapshot of value the day we purchase a share of the company and is but another piece of the puzzle. If we find a business selling close to its growth rate it is considered cheap in comparison to it’s growth. TRY will tell us it’s value relative to the earnings and retained earnings we can expect to receive. Your portfolio updates this weekend will include this metric, the results may surprise you.

Tags MO, sbux

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Some Portfolio Updates

Post author By ToddSullivan
Post date February 6, 2007

SHLD- Is there something Going On Here?
SHLD has been bouncing around rather undramatically between $170 and $180 for the better part of a couple months now. Investors have been waiting for Eddie Lampert to make his next long awaited acquisition and for the FY 2007 results on about March 1st. Barring any significant news, I had not expected the stock to do much of anything exciting either way. Something very interesting happened Monday while you were at lunch. At about 12:30 buyers (or one big one) came into the market big time and SHLD shares jumped from $178 to almost $183 in only 16 minutes. Clearly somebody thought they new something. Had this just been a mutual fund buying shares to accumulate a position they would have done so gradually and not caused the spike in the price. This was somebody big rushing in as fast as they could to be there before an event. It is clear that they though news was imminent that was going to drive the stock up and wanted to be there first. It is called “unusual volume”. No news was released and the stock settled just shy of $180 up 1.55 % for the day. Nobody can keep a secret on Wall St. no matter how hard the regulators try to keep them quiet. Keep an eye out…

OC:
Owens Corning (NYSE: OC) announced that it is currently scheduled to announce its fourth quarter and full-year financial results on Wednesday, Feb. 21, 2007, prior to the opening of the New York Stock Exchange.

Dave Brown, president and chief executive officer, and Mike Thaman, chairman and chief financial officer, will host an earnings conference call on Wednesday, Feb. 21 to discuss the company’s results for the fourth quarter and full year of 2006.

Owens Corning also established the following dates to announce financial results in 2007. These dates are a forecast of Owens Corning’s earnings announcement calendar and are subject to change.

   -- May 2, 2007 - First quarter 2007 financial results
  -- Aug. 1, 2007 - Second quarter 2007 financial results
  -- Nov. 1, 2007 - Third quarter 2007 financial results

ADM:
Archer Daniel’s Midland announced CEO Patricia Woetrz has been named Chairman of The Board. ADM, the world’s largest producer of both ethanol and bio diesel, is the largest American company headed by a female CEO. ADM also raised it quarterly dividend by 15% to 11.5 cents a share. This is payable on March 9th and will be reflected in the portfolio in the April update.

DOW Chemical CEO Andrew Liveras
In re-reading the recent interview he did after last quarters earnings something struck me. Mr. Liveras in a value investor! Look at what he said when asked if DOW would use its growing cash hoard to make acquisitions. He said “asset prices in many areas are inflated due to private equity” he went on, “in this environment we would be more likely to be a seller of assets than a buyer”. In the same vein he said “any acquisition we were to consider would have to be immediately accredive to earnings”. Translation: If it is not cheap enough to add to earnings this year we will not do it. So, he is willing to sell overpriced assets and will only buy underpriced ones…. sound like a value guy to me.

The Wall Street Journal & Value Plays:
On Thursday Feb. 1 I posted here that Altria shareholders should dump their Kraft shares after the spin off. On Monday the Wall St. Journal penned a pieced titled “Altria holders may bet against Kraft shares”, in it they suggested another way to profit from the expected surge of Kraft shares hitting the market. From the article:

“The hedge is on shares of Kraft Foods Inc. that Altria shareholders are about to receive. Altria will spin off its stake in Kraft next month, giving investors 0.7 share of Kraft for every Altria share they hold.

Excitement about the move, which was announced last week, has helped lift Altria’s shares about 13% since the third quarter, as the company overcame barriers to the spinoff.

Shares of Kraft, on the other hand, have lost nearly 5% in the four months as the company has faced competition and cost pressures.

So it is understandable that Altria shareholders might not be that interested in keeping the shares of Kraft they are due to receive, and that has some expecting that a flood of stock for sale will cause a notable decline in Kraft’s share price. “More than $50 billion of Kraft equity needing to find a home all at once will likely cause an extended oversupply of the shares,” D.A. Davidson analyst Timothy Ramey said in a recent note.

Investors worried about this should “go out and buy puts even though they don’t own the stock yet,” said Joseph Palazzola, options strategist at A.G. Edwards & Sons.

By doing so, investors can lock in Kraft’s current $34.03 share price — less the cost of the puts, of course.”

Buying any option entails an investor being prepared to lose all of their money since when you buy an option you do not actually own anything. It’s value is based on the difference between the strike price of the option and the price of the stock it tracks. In theory you could go to lunch, have good news make the stock jump and be left holding an option worth nothing in this case. Add to this options trade on supply demand just like other securities so the price you will be paying for these suggested puts will be expensive. Short term options trading is very volatile and if you cannot watch these trades you could lose your whole bet (notice I said bet and not investment, short term option trading is just that, betting not investing). Unless you own at least a thousand shares of MO and would be receiving 700 Kraft shares, after you figure in transaction costs, the risk you are taking on vs the potential reward is just not worth it. I will not do any of this. I will take my spin off, be happy and not get greedy.

USO:
As of this morning our USO pick is up almost 10% in a few weeks. Remember, when I recommended it I said I thought at that price it was at equilibrium. Any news would cause it to jump either way. The current cold snap in the US has cause upward price pressure. Should this cold last expect this trend to continue. Complicating matters is Iran again. They recently said that on March 11 they will have a “significant announcement”. Who knows what that means. But as that date comes closer speculation will grow rampant. That will lead to fear. Remember, fear in the oil markets acts contrary to fear in the stock market. This fear will cause the price of oil to rise. If the news is rather benign, expect oil to fall (assuming no other major event leading up to it). Should the price of oil run up ahead of the announcement on a worse case scenario and the news is bad, oil may just sit where it is since this news has already been factored in. What am I trying to say? Do not get either to happy or frustrated with this. I said oil is very volatile and the last two weeks have proven that. The long term fundamentals of the investment still remain. Just sit back and hold on.

Tags davidson, dow, MO

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The Value Plays Portfolio

I have talked about quite a few stocks here and have been asked by readers, “do you own all these stocks”? Well, no. I have put together an “Official Value Plays Portfolio” so you can track my suggestions and in turn, measure my results against others and the market as a whole. Just so everyone understands what the following chart means and how I am going to measure the results, here are the ground rules:

1- The “buy price” is the price the day my post hits that says “buy”. Even though I write the blog the day before it is published in most cases, in order to make every recommendation verifiable, it will be tracked from the date on the blog. Even though I have owned several of these picks for years, I cannot prove this to you so the date of the blog will now be the “buy price”. For stocks we advise you avoid, we will track those by the price per share the day I recommend you avoid them.

3- Should I recommend the purchase of additional shares of a security, that will be reflected by another entry for that security and that price (to assure consistency with the new post).

4- I will update the results the first week of each month. Since I am “long term” oriented, I will not break out results quarterly or annually. If you have read my posts, the conditions that will trigger a security to be sold will not be a temporary drop in the stock price, so monthly and quarterly results are essentially irrelevant. I have found that the shorter I make the tracking time frame of an investment, the more likely people are to make decisions based on short term events and not long term fundamentals. This is counter to my philosophy, so to help prevent that, all results will be “from inception”. By default since this is new, the initial results must be short term but as time goes on this will change. The benchmark I will use for comparison will be the S&P 500. It also will be tracked from the inception of my first post 1/18/2007.

6- I may engage in some options purchases or sales. If I do these will also be reflected on the tracking.

8- Updates are current prices.

With that, here it is:

Tags MO

Articles

Altria Shareholders (MO)- Dump Your Kraft Shares

Post author By ToddSullivan
Post date February 1, 2007
2 Comments on Altria Shareholders (MO)- Dump Your Kraft Shares

I know, I know, typically in a spin off situation the shares of the company being spun off outperform the market. But, this is no typical situation. In a normal spin off the parent company feels the segment being spun is not being fully valued in the price of the parent companies shares (see the McDonald’s (MCD) and Chipotle (CNG)) so they spin it off in an effort to return this value to shareholders and raise additional cash. These spin offs are usually fast growers than then begin trading at relatively inflated pe values and their stock tend to outperform the market on a percentage basis until their growth slows as they mature. Here we have Altria (Phillip Morris), whose stock has performed better than any stock in the history of the market getting rid of an albatross.

The acquisition of Kraft was an ill conceived plan to diversify away from the business of tobacco. It accompanied the name change from Phillip Morris to Altria. Kraft does business in a low margin low growth arena and this never meshed with the highly profitable tobacco segment. This became a drag on the shares of Altria. Kraft’s shares were hurt due to it’s association with tobacco by both the stigma on it products and the potential for the tobacco litigation effects to spill over onto Kraft.

After the split Altria shareholders will get .7 Kraft shares for each Altria share they hold. In Kraft you will hold shares in a mature company that will begin a restructuring process (shedding brands) to return to more acceptable profit levels. Plus, very important here, Kraft has no durable competitive advantage (see earlier post). Brands can make for a durable advantage (Nike, McDonald’s, Marlboro, Coke to name a few) but when you associate Mac & Cheese with tobacco, it disappears. You must be careful with your brand and nurture it, Kraft failed to do so. I am running from this stock. Who knows, it may end up turning thing around and be a success, but given the choice of owning MO or Kraft, to me it is a no-brainer.

In Altria you will have the best performing stock in the history of the stock market, paying a great dividend who is getting back to just doing what has made it great, selling cigarettes. Thanks to the Master Tobacco Settlement in 1998, the tobacco companies lawyers duped the states into essentially giving Altria a state sponsored monopoly (Marlboro has 50% market share). The states have become slaves to the tax revenues and “penalties” the tobacco companies who signed the settlement must pay (these have been easily passed on to smokers). It now behooves the states to protect the companies market share, sales and profits as their compensation is tied to these metrics. Should the companies lose ground (market share), they are entitled to refunds from the states. It is ironic, the states are trying to “stop smoking” but cannot live without the revenues those smokers provide via the tobacco companies. We are talking billions of dollars here, not millions. The tobacco companies in essence made the states defacto shareholders. Brilliant. Is it just me or did the tobacco industry’s “legal environment” suddenly begin to change after this agreement was signed and the states realized that bad legal outcomes for the companies were in turn bad for them? Beginning in 2000 Big Tobacco began racking up one legal victory after another in the courts. It is to the point now where they are exposed to almost no credible legal challenges. To quote MO CEO Louis Camilleri yesterday “This is the best litigation environment ever for tobacco companies”. Straight from the horses mouth. I am really not one prone to these conspiracy theories but sometimes “if it walks and quacks like a duck then….”.

I would expect MO to spin off Phillip Morris International soon after the Kraft spin off is done at the end of March. Then I would look for huge dividend increases (maybe a special one time dividend) and massive share buyback to reward shareholders. To quote Sinatra “the best is yet to come….”

For those “morally opposed” to owning tobacco stocks. Don’t be foolish. Why not own them, make gobs of money with them and do something good with it? Donate it to a charity, your church, pay off your kids school loans or even give it to “stop smoking” programs.

MO shareholders are going to make a lot of money for a long time, be one of them and do what you feel is the “most moral” thing with the proceeds. Maybe you can do more good in your corner of the world with it than they can do harm with their products. I am going to try….

Tags MO, PM

Articles

When To Sell? The Case Of Coca-Cola

Post author By ToddSullivan
Post date January 29, 2007
1 Comment on When To Sell? The Case Of Coca-Cola

So, we have discussed what types of stocks to buy and that our holding period is measured not in days or months but in many times years. The question now begs us, when should we sell? There are a couple of scenarios.

Deterioration of Business Environment: Let’s compare Coke (we will use Coke (KO) here since it is #1 but any soft drink will do) with tobacco. Currently soft drinks are under fire by health conscious politicians as our national obesity epidemic grows. Pretend for a minute (this is not such a big stretch) that in order to pay for “the health effects and costs of obesity” soft drink makers (like the tobacco companies) are ordered to pay billions to the states. Congress eliminates the companies ability to advertise their products to stop their use by minors and levies oppressive taxes on them to help pay these health costs. This causes the cost of a can of soda in a vending machine (when you can find one) to go from the now $1.50 to $2.50 or more. All soda is eliminated from schools or anywhere a child under 18 can easily purchase it. Unlike tobacco, whose users are addicts (and who seem more than willing to let these costs be passed down to them), the soft drink industry would collapse under this strain as people stopped buying them and switched to cheaper options. Any hint of this scenario would be time to sell any soft drink maker in your portfolio.

Valuation: During the frenzy in stocks that precluded the inevitable crash in 2000 Coke’s valuation became, in a word insane. Coke hit a high of $83 a share at the end of 1998 and sported a pe of over 50 times earnings. This is irrational for a company like Coke (I would argue it is irrational for ANY company but that is another post). Coke was a mature company growing in the teens (growth rate) and had typically only ever had high price to earnings ratios in the low 20’s. Investors were paying over twice that! Had you considered buying shares of Coke at the time I would have argued that it was too expensive (overpriced) on both a historical and absolute level. Now, if it is too overpriced to buy, ought not we consider selling it if we own it? Our own rule tells us the price must fall to a level commensurate to its growth rate. It did, to about $45 a share and now trades at a pe ratio of 20 times earnings, in line with historical averages. Why not sell it then and wait patiently for it to come to an appropriate valuation and purchase shares again? In this case it would have taken until Jan 2003 until its valuation was something that I would be willing to invest in (it would have been fairly priced, not a value). Coke’s largest investor Warren Buffett has several times in interviews lamented the fact he did not sell his stake in Coke during this period.

Odd Merger’s: There are many times mergers make sense. Proctor & Gamble (PG) buying Gillette, for instance. Two large consumer products companies coming together to make a stronger one. Then there are merger’s that make you scratch your head like AOL (AOL) and Time Warner (unmitigated disaster), Kraft Foods (KFT) and Phillip Morris (MO) or RJ Reynold’s Tobacco (RAI) and Nabisco Foods which have not worked out fully for either companies investors. Currently Altria (Phillip Morris) is in the process of spinning off Kraft Foods to “unlock value for investors” (translation: undoing the merger). This merger has dampened the appreciation of the stocks of both companies. The price investors are willing to pay for Altria stock is depressed because the low margin food business was seen as a drag on the highly profitable tobacco business and the tobacco business’s constant litigation woes are seen as a drag on the food business depressing the impact of Kraft’s contribution to the whole company. Now, contrast this to Altria’s purchase of 30% of SAB Miller (Miller beer) which has been a huge success for both companies (booze and cigarettes go together better than cigarettes and mac & cheese). Now, Altria’s stock has been one of the best market performers in history but even conservative estimates today place a 20% value appreciation from its current levels to investors after the spin off. Yes I own and would recommend you buy shares of Altria (MO). Coke, and even Pepsi for that matter have been very smart here . They have expanded their product lines in what they do best, non alcoholic beverages. Pespsi (PEP) ventured outside this with its purchase of Frito Lay but I think we would all agree that chips and soda mesh perfectly. Were ether to venture outside of this arena to an area wholly unrelated to their current businesses, red flags for investors should go up.

Note: The merger discussion does not apply to Holding Companies. By their very nature, holding companies set out to acquire a wide variety of unrelated business, take the profits from them and acquire more business. They have mandates from their board of directors to do this as their growth strategy.

I hope you can see that there really aren’t many reason to sell a stock IF you purchased it correctly. If you buy a good company with a durable competitive advantage and at great price there are only two real reasons to sell it. A fundamental change to the company (poor merger) or its business that negatively alter its future prospects, or its stock price becomes irrational overvalued. Be careful on price induced selling, there are always tax implications to consider when selling. The level of excess valuation must be far greater than the tax you will be forced to pay on your profits for this to be worthwhile. A poor quarter is not a reason to sell and in all actuality if the underlying business is still strong and the reasons you purchased it still apply, this is a perfect time to purchase more shares if their price falls.

If the stock price stays stagnant for an extended period of time, this too is no reason to sell. During the tech bubble of 1998-99 Berkshire Hathaway (BRK.A) shares fell almost 40%. Investors fled to tech shares and the latest “hot stock” they heard about at cocktail parties. Most of these companies had not yet figured out how to make money but did have fancy websites and a whole new vernacular to impress potential investors. Yet, there was nothing wrong with Berkshire’s businesses. They were all performing well and growing. Buffett was called “out of touch” with the new business paradigm because he felt paying 140 times earnings for Yahoo was a bad idea. The inevitable happened, there was no new paradigm, earnings still mattered and Berkshire stock has more than doubled off its lows while tech investors are still underwater with their picks.

The business matters more to you than the stock price. There will be times when there is a disconnect between the current state of the business (its actual value) and its stock price. Both the Coke and Berkshire examples above illustrate this. Do not get caught up in the hype either way. As Buffett likes to say “buy fear and sell greed”. When prices are unjustly inflated (Coke in 1999) sell and when they are unjustly depressed (Berkshire in 2000) buy and thus a value investor you shall be (wealthy too).

Tags buffett, MO