Tag: MO

The Philip Morris USA unit of Altria Group (MO) has decided to launch a smokeless product under the Marlboro name. In some corners this is being called “a substantial risk”. Not only is it not a risk, it is the closest thing to a slam dunk. Here is why.

Almost forty percent of the cigarettes sold in the U.S. are Marlboros. In order to truly appreciate the dominance Marlboro has on the industry, one had to consider #2, is only at 6%!! Now you also have to consider that it has been this way for almost 1/2 a century.

Let’s talk about smokers. There isn’t a more brand loyal lot out there than tobacco users, except for possibly scotch drinkers. Having both smoked and chewed (many years ago), I am speaking from experience. If you smoke or chew a brand, that is your brand, period, end of story. Only under the most extreme circumstances will you switch and it is doesn’t have anything to do with price, it has to do only with availability. If you cannot get your brand, you will use another and that is the only reason. This is the why Altria has been the single best investment in the history of the US stock market.

Now the new product. Smoking rates have decreased steadily for some time now while smokeless tobacco use is increasing 3%-4% a year and up until this point, Altria has not been in this market. The new product can be used in offices and restaurants since it does not violate any of the smoking bans enacted in recent years and it is not “wet” like other forms of smokeless tobacco so users do not have to spit juice. In April I posted about the product not then labeled under the Marlboro brand name and now that it is, I am more excited that ever. Chew users will gravitate to this brand as they can use it anywhere and not have to carry a plastic Coca Cola bottle around filled with spit. But that is not the best part. The kicker is: Since it is a dry product, smokers will use it when they are inside and do not want to have to go to the “smoking area” and be looked down upon like lepers. They can now sit at their desk’s and get their fix, no one will be any wiser and there will be no lost work time. There will also be the added bonus of not smelling like an ashtray all day (it’s the little things). What does all this mean? More tobacco sales for Altria. Simply put, you have the number one brand of tobacco giving it’s users the ability to now use their product in places they now cannot. Perhaps this is why the tag line “Flavor Anytime” is being tossed around. Ka-Ching..

So let’s address the elephant in the room. Cancer. Snus is widely used in Scandinavia, where numerous studies proved that it offers smokers an alternative way to get the nicotine and taste of cigarettes with less risk of cancer. A safer product that can be used everywhere smoking is banned and is spit free. Where is the problem?

Investing morality. When god created man he did so in his own image. This means he gave us “free will”. We are free to drink, smoke, gamble, eat lousy foods, drive like a-holes and smash our hands with hammers so should we choose to. Now there may be ramifications to any of those actions, but we are free to do them. Folks are free to smoke and I choose to watch my kid’s college funds grow from it, guilt free. I stopped, so can they.

Ignoring a great investment on moral grounds is just foolish. Profit from it and do something good with the money if you are so inclined. You will never stop smokers by not buying Altria shares. If you do buy them and profit you may actually be able to stop young smokers by funding programs at local schools. Avoiding shares because they “sell tobacco” is just putting your head in the sand and plain stupid. Poverty never cured society or it’s ills, wealth has cured plenty.

Will it sell? Will Apple (APPL) fans buy iPhones (they would buy a hell of a lot more at a reasonable price)? Will Diageo’s (DEO) Johnny Walker Black users buy Blue? Will Star Wars fans line up around the block for the next installment?

Need I go on?????

The New York Court of Appeals on Thursday ruled tobacco companies who are part of the 1998 agreement that settled tobacco litigation with most states can go to arbitration to try to reduce their settlement payments. The $246 billion Master Settlement Agreement required tobacco companies to make annual payments to the states and also placed restrictions on how cigarettes are marketed but, if the tobacco companies that signed the agreement lose market share because of those restrictions, they are entitled to a refund of payments.

“It’s clearly spelled out in the Master Settlement Agreement that a dispute over a payment, which this is, should be resolved through binding arbitration,” said David Howard, a spokesman for R.J. Reynolds who has spearheaded tobacco’s fight for reimbursement. Altria had no comment.

Thursday’s ruling, which is in line with decisions by other state courts, means the tobacco companies can now try to reduce their 2003 payments through arbitration.

An auditor previously found in March 2004 that the companies who signed the settlement lost market share in 2003 and determined restrictions from the agreement were “a significant factor contributing to this loss”.

Among the companies that signed the master Settlement Agreement are Altria (MO) and Reynolds American (RAI) although neither was part of Thursday’s litigation.

One of two things will end up happening. Either the states will have to fork over hundreds of millions of dollars back to tobacco companies, monies that they just do not have or, the Master Settlement will be redone to both assure market share for it’s signers, and further insulate the industry from future litigation. The second is the most likely scenario as states are pitifully dependent on the tobacco monies and simple to not have the fiscal ability to part with it. Assuring market share gives growth back to the signers and a more ironclad agreement cements their stranglehold on the industry.

Altria is letting today’s plaintiffs, Commonwealth Brands, King Maker Marketing and Sherman and do it’s dirty work while it plays good corporate citizen by supporting the FDA’s potential regulation of cigarettes. The best part is? They are not only willing to do it but they are winning. Altria can rides their coat tails, avoid the legal expenses associated with it, and reap the rewards.

I simply cannot remember a time in which the litigation environment surrounding tobacco was this good.

The Board of Directors of Altria Group, Inc. (MO) Friday declared a regular quarterly dividend of $0.69 per common share, payable on July 10, 2007, to stockholders of record as of June 15, 2007. The ex-dividend date is June 13, 2007. The new dividend rate reflects an adjustment for the Kraft (KFT) spin-off, which was completed on March 30, 2007. Now don’t get me wrong, a 3.8% dividend that grows and is as close to money in the bank as you can get is nice, but not really what we were hoping for.

What we really wanted was something about a share buyback, PMI spin, maybe a nice fat increase in that dividend? But, nothing.

Now based on Altria’s history, shareholders in all reality have nothing to worry about. These will come, we will benefit and the stock will rise. It is just when you get yourself ready for something and it does not happen, you feel a bit let down. Couldn’t you even have hinted about it guys?

Now the option players are betting on an announcement by January. Open call interest for the January options is huge and where some of the most active options traded last week. For the $90 strike price there over 100,000 contracts open and the $85 and $100 prices each have over 50,000 contracts open, representing 200 million shares.

The Kraft spin was officially announced in January of 2007 so it seems folks are betting on similar timing for these other moves.

I guess we will just have to keep collecting our fat dividend, sit back and wait.

Much has been said of the run up in the past twelve months of both the Dow and the S&P to all time highs. But, even after this impressive run, are the stocks in those averages more expensive than last year, or are they still bargains? When you have components lime Alcoa (AA), Altria (MO), Caterpillar (CAT), Hewlett-Packard (HPQ) and Boeing (BA) all trading around their all time highs, should we be worried?

Dow Jones

Current PE= 18.1
Last Year PE= 21.11
Current Earnings Yield= 5.53
Last Year Earnings Yield= 4.74

S&P

Current PE= 18.42
Last Year PE= 17.74
Current Earnings Yield= 5.43
Last Year Earnings Yield= 5.64

So, where does this leave us? The DOW, even after it’s run is at the present time cheaper than it was at the same time last years on both a PE and an earnings yield basis.

The S&P 500, while slightly more expensive that the same time last year the difference is negligible so it is essentially flat.

All this means is that the large cap Dow is currently cheaper than a year ago, so if you believe earnings and the economy will improve later this year, there is still plenty of room for the Dow to run. The S&P 500, while just about equal to last year, is in the same boat.

Here are the increase leader for the past month. People who are negative on a stock will sell it short in hopes on buying it back later at a cheaper price. Large positions can lead to a “short squeeze”. This happens when large numbers of short sellers are forced to buy back the stock as it rises, this cause huge buying and usually a dramatic run up in the stock. Here they are:

The number is the increase in the number of shares short (rounded):

CVS (CVS) = + 46,000,000
Valero (VLO) = + 35,000,000
Altria (MO) = +29,000,000
Advanced Micro (AMD) = + 28,000,000
Ishares Russell 2000 (IWM) = + 18,000,000
Regions Financial (RF) = + 17,000,000
Time Warner (TWX) = + 16,000,000
Constellation Brands (STZ) = + 14,000,000
Delta Airlines (DAL) = + 14,000,000
Southwest Airlines (LUV) = + 13,000,000

I have had quite a few posts on MO recently and this is a product of both earnings season and investor meetings, not a myopic focus on one stock. There were a couple of very important items discussed and disclosed at the annual meeting today. Here they are with opinion.

CEO Camilleri: “Over the next several months, we will continue to carefully and diligently examine the benefits of a spin-off of Philip Morris International (PMI) and other possible value-enhancing options to decide the optimal long-term strategic course to follow.”

Before the Kraft (KFT) spin there was no mention in any earnings report or announcement of the possibility of a spin. The very fact that Camilleri is even discussing it all but assures the spin shareholders want. It was also discussed on the earnings call last Thursday. It needs to be pointed out here that PMI is set up to run as an independent company so the actual spin will only be a paper transaction, not a logistical one.

Shareholder Returns

• Our total shareholder return was 19.9% in 2006, assuming dividend reinvestment, outperforming the Standard & Poor’s (S&P) 500 Index for the fifth consecutive year.
• Over the past five years, our total shareholder return has been an outstanding 142.6%, significantly ahead of the five-year total return for the S&P 500 Index at 35%.

Altria and Philip Morris USA (PM USA) believe regulation of tobacco products by the Food and Drug Administration (FDA) would establish a comprehensive national tobacco policy that could potentially create a competitive framework within which manufacturers are focused on reducing the harm tobacco use causes. The companies believe regulation would also bring predictability and clear standards to the tobacco industry in the United States.

On February 15, 2007, Senators Edward Kennedy (D-MA) and John Cornyn (R-TX) and Representatives Henry Waxman (D-CA) and Tom Davis (R-VA) introduced legislation to grant the FDA broad authority to regulate tobacco products. Altria and PM USA strongly support this bipartisan legislation and urge Congress to take quick action on the Kennedy/Cornyn and Waxman/ Davis FDA bills.

• Regulation of nicotine. The FDA would have authority to reduce nicotine yields and to reduce or eliminate harmful smoke constituents or harmful components of tobacco products;
• Authority for the FDA to regulate descriptors such as “light” and “low tar”;
• Changing the language of the current cigarette and smokeless tobacco product health warnings, enlarging their size and granting FDA authority to require new warnings in the future;
• Full disclosure of ingredients added to tobacco products;
• Authority for the FDA to require ingredient testing and to remove harmful ingredients;
• Authority for the FDA to do more to prevent minors from using tobacco products;
• Authority to establish standards for products that could potentially reduce the harm caused by tobacco products and to define the appropriate ways to communicate about these products; and
• A ban on the sale of candy and fruit-flavored cigarettes.

The Best Part
Camilleri: “Our ability to generate cash flow remains undiminished. Over the four-year period from 2006 through 2009, we project that cash flow will reach a cumulative level of some $41 billion. We plan to continue using our strong cash flow to reward you, our shareholders.”

• “No matter how you try and spin it, they missed the quarter, missed it. All the other items in your post (spin off of PMI, buybacks) are all old news, the street has already factored them into the price of the stock. That is why it did not even participate in this weeks action.”

Earning Highlights:

• Consolidated net sales were $1.756 billion and diluted net income per common share was $.83
• Opened 27 net new stores; 17 in Paint Stores Group and 10 in Global Group
• Working capital ratio–accounts receivable plus inventories less accounts payable to 12 months sales–was 13.1% for the quarter compared to 13.7% last year
• Gross margin increased 150 basis points to 45.1% of sales from 43.6% last year
• Reaffirming EPS guidance of $4.55 to $4.65 per share for the full year

Christopher M. Connor, Chairman and Chief Executive Officer, commented

• “In spite of the tough paint market in the first quarter, we continued to invest in new stores, opening 17 net new locations in Paint Stores Group and ten in our Global Group. We made further progress in our management of working capital, reducing our working capital ratio to 13.1% of sales from 13.7% in the first quarter last year. Our operating segment management teams continued to achieve improved gross margins as a result of hard work invested over the last few years to return our gross margins to more normal run rates after being pressured by the significant rise in raw material costs during 2004, 2005 and 2006. We created shareholder value by our practical use of cash to buy shares of our own stock and increased the dividend rate (26%), and have strategically positioned our balance sheet to be financially sound and capable of financing our business growth. “

• “During the second quarter of 2007, we anticipate achieving a percentage increase in consolidated net sales in the low single digits over last year’s second quarter. With sales at that level, we expect diluted net income per common share for the second quarter to be in the range of $1.37 to $1.45 per share compared to $1.33 per share last year. For the full year 2007, we anticipate that the percentage increase in our consolidated net sales will be in the low single digits over 2006. With annual sales at that level, we are reaffirming our guidance that our diluted net income per common share for 2007 will be in the range of $4.55 to $4.65 per share compared to $4.19 per share earned in 2006. For the second quarter and full year 2007, we expect the effective tax rates will be slightly higher than the rates recognized in 2006.”

Sherwin Williams (SHW) has taken a hit the past month due to it’s ties to the US housing market and the RI ruling. This ruling, while a short term negative is virtually meaningless when compared to the California Superior Court Ruling which will eventually lead to the RI case case being filed where it should be, the garbage can. This quarters numbers prove that management is adept at managing the company through these headwinds. Let’s not forget, these numbers are up against 2006 numbers that included a still booming residential housing and DIY (do it yourself) market. Two key factors contributed to offsetting the earnings decline:

• The Company acquired 3,350,000 shares of its common stock through open market purchases at an average price of $69.27 during the quarter and had remaining authorization at March 31, 2007 to purchase 9,471,000 shares.

• The Global Group’s net sales in the quarter increased 5.7% to $402.2 million from $380.6 million in the first quarter last year when stated in U.S. dollars. This Segment’s net sales increase of 4.8% in local currency was due primarily to a new product introduction in the U.K., architectural paint selling price increases and volume gains in South America and improved automotive and product finishes sales. Segment profit of the Global Group for the quarter improved $2.9 million, or 9.0%, to $35.4 million from $32.5 million in the first quarter of 2006 and increased as a percent to net sales to 8.8% from 8.5% last year

The growth in the global group offset the decline in the US DIY and New Residential segment and the shares buybacks did the rest as SHW was able to avoid an earning decline of a strong 2006 comparison. It should not be lost on readers that this international segment will take on further prominence and do more to insulate SHW from the US housing market due to it’s recent purchase of India’s Nitco Paints. This gives SHW a huge footprint in an paint market growing at a near double digit rate. The effects of this should be seen in the second half of 2007 and is probably the reason that despite the predicted Q2 earnings miss by the company, they still back their full year estimates. Another note: This anticipated “earnings miss,” is a miss on the current estimates that analysts have for Q2. SHW’s estimate of $1.37 to $1.45 a share is still above last years $1.33 number. I can live with that given the drastic deterioration in housing since last year.

Let’s also not forget the stock buyback. Although they do not expect to use the bulk of the authorization this year, the number of shares they are still authorized to buy represent about 7% of outstanding shares, providing another buffer for us shareholders. Gotta love it.

Lead Paint
After a brief summary of current litigation statuses, the subject was not revisited. Not one analyst on the call ask a single question about this. This is very telling as during the Altria (MO) call this morning (yesterday), several questions referenced the litigation environment surrounding tobacco, despite this being the best that environment has been in almost a decade. This has to lead one to believe that the analysts on the call (as well as yours truly) are not very concerned about the possibility of an eventual negative outcome here. While it is having a restraining effect on the stock now, when this cloud eventually evaporates, away we go..

SHW CEO, Mr. Christopher O’Connor is another wonderful example of a CEO who takes his fiduciary responsibility to us shareholders very seriously. Everything he is doing at SHW (dividend increases, buybacks, overseas expansion) are all geared at rewarding us shareholders. Sherwin is going to be not just a national leader but a global one soon. I currently own shares and will look to pick up more on weakness.

• I do not like to sell the stock of a company I own unless there has been a deterioration of it’s business or fundamentals.
• There are tax implications that are not usually considered that dramatically reduce the returns the covered call seller actually realizes.
• Too often this covered call strategy has the effect of “capping” profits, meaning the seller of the call ends up selling their shares prematurely at a lower price than they could have gotten on the open market

• Only sell them in companies I want to own shares of stock in. That way, if the strategy goes against me and I am “put” the shares (forced to buy them) I at least now own stock in a company I want to own.
• Only do this when the stock is in a price range in which I would consider buying shares in the open market at. Again, this way if the strategy turns against me and I am forced to buy the shares, I am paying a price for them I am comfortable with.