Altria: Stuff Your Stocking With This Long Idea

Dec. 6.06 | About: Altria Group, (MO)

I have conducted an analysis on Altria (NYSE:MO) and have found it to be a great buy. Here are the catalysts why:

* With the board of director's meeting coming up in January 2007, I believe the time to get into MO would be right now. Why? Because MO's valuation will go up as the timing for the Kraft (KFT) spin-off becomes clear after this said board meeting in January. Kraft Foods is the largest packaged food company in North America, accounting for 24% of total company sales and 23% of operating profits in 05. I also believe the risk reward ratio is favorable - 6 to the downside and 10+ to the upside.

* Tobacco fundamentals have improved over recent years as deep discounters brought their prices up in response to increased costs, and they are generally in line with premium cigarette price increases. Another positive for the industry is that the proposed cigarette excise tax increases were defeated in California, Missouri and South Dakota.

* Louis Camilleri, CEO, reiterated on November 16 that MO is committed to providing the details about the spin off on January 31, 2007. Altria shares continue to trade at a discount because some investors remain skeptical that the spin-off announcement will occur and are concerned that a spin-off will not be allowed by the court.

* In 04, Kraft announced a three year restructuring program to leverage its global scale, realign and lower its cost structure, and optimize its capacity utilization. The program was expected to cost about $1.2 billion, and MO projected cost savings of about $400 million by 2006.

* The main hurdle clouding the prospects of the spin-off near-term is the pending Schwab case, a nationwide class-action suit certified on September 25. The certification was a surprise to investors and the company following the oral argument hearing, because many believed the arguments of the plaintiffs lacked the standard to warrant class certification.

* This Schwab case's hold back is currently reflected in the stock price, which, I believe, is the main reason the shares have not seen further upside. A successful injunction could result in a significant delay in the breakup of the company as it could be in place until the final resolve in the Schwab case, which could take many years as it progresses through the inevitably lengthy appellate process. That being said, I do not believe the injunction will be likely.

* Investors should note that following the class certification, Altria announced that it would postpone its spin-off of Kraft until the case was potentially de-certified by the 2nd Circuit Court of Appeals. Then, one month later, the company reversed its prior decision to postpone the spin-off and announced the January 31, 2007 board meeting to finalize the details of the spin-off.

* According to Goldman Sachs (NYSE:GS), Altria is the second most important stock for many fundamental hedge funds. Thirty hedge funds hold Altria among their 10 largest single stock positions with an average portfolio weight of 7%. Only Microsoft (NASDAQ:MSFT) is held more frequently by hedge funds among their top 10 holdings. Thirty-seven hedge funds own Microsoft among their 10 largest holdings with an average portfolio weight of 5%.

* In my view, the fundamentals have meant little with respect to the stock price up until this point as litigation and breakup speculation are the primary drivers of the stock. Meanwhile, the fundamentals adequately support Wall Street's estimates of a breakup value of $95-$100 per share.

* I expect improving conditions from PMI in 2007, resulting from higher minimum excise taxes, increasing market share, new products, geographical expansion opportunities and increased pricing opportunities in Western Europe. Considering the challenges for PM USA and improved outlook for PMI alongside the aforementioned analysis I believe the time to buy Altria is before December ends [not to forget the 4+% dividend].

MO 1-yr chart
MO