Jump Aboard The Altria Train

| About: Altria Group, (MO)

On Dec. 6th I talked about catalysts that make Altria a buy. Since then the stock is up 6+ and I believe the stock is still going higher. Hence I'm going to present my analysis and reiterate a buy, as there are major catalysts coming on Jan 31st, with a potential Kraft spin-off and an improvement in international tobacco trends.

While I believe the company will only announce a spinoff of its Kraft shares, and not a more comprehensive restructuring, the time to get in the stock is right here right now if you don't already own it. I believe the shares will trade up to the multiple over the next year as investors value both the international and domestic tobacco divisions (PM USA announced a price increase Dec 13 of 10 cents per pack and MO's Board will take further restructuring actions through a division of PMI and PM USA to unlock MO's full value).

Furthermore, litigation pressures are continuing to ease. The Illinois Supreme Court has dismissed an appeal in the Price case, reversing the lower court's $10 billion damages award against PM USA. Also, the Florida Supreme Court recently upheld a reversal of the $145 billion award in the Engle case. Hence, I believe the rulings reduce MO's cash flow risk and move the company closer to possibly breaking up.

Similarly, On January 3rd, UVV announced that a California court reduced punitive damages previously awarded to plaintiffs in the Rosemary Valladares, case. Compensatory damages awarded in the case were about $200K, and punitive damages have been reduced by the trial court to approximately $1.25 million from the original jury award of $25 million. This is indicative of my belief that litigation pressures are easing.

MO’s operating margin improved by 64 basis points YoY to 26.38% in Q3 06 benefiting from KFT's gain on the redemption of its interest in United Biscuits, an improved product mix and continued manufacturing efficiency at KFT. This was partly offset by the continued challenges faced by international tobacco business in Spain and an unfavorable volume mix in Japan.

Earnings growth is also likely to accelerate in 07 driven by improvement in international tobacco trends. The Street has increased EPS estimate by $0.05 to $5.63 for 07, which reflect stronger profit growth in the PMI’s tobacco operation. Indicative that earnings growth will accelerate to about 6% in 07, following a muted 3% growth in 2006. The acceleration in earnings growth should be driven by higher profit growth at PMI.

If you look at the industry, you will notice that smaller discount manufacturers that have not had to incur costs from the MSA are making inroads into the marketplace, both in the US and internationally.

The Street believes this year we'll see see a bit of consolidation from the major US companies in the form of RJ Reynolds plans to buy BAT’s Brown & Williamson operations. This, along with a renewed push into further developing areas worldwide for new smokers, the Tobacco industry should be able to weather the most recent storms.

The Trade: You can buy the stock and buy some Feb calls, but if you have a good risk appetite, like myself, and don't mind being a little aggressive, then I'd suggest a straddle which includes buying Feb 95 out-of-the-money calls and puts. The lowest stock price The Street expects after the break up is 95$, hence let's buy 95. Or you can just buy calls. To be honest I'm not 100% sure if I want to buy puts, yet, but its always good to be hedged, as the only sure thing is death and taxes!

So, once again, get on the MO train, before, like Apple (NASDAQ:AAPL), they really get away from you.

MO 1-yr chart