Altria Dims as Overseas Spinoff Gets Marlboro Growth

Source from:  By Chris Burritt March 27 (Bloomberg) 03/31/2008

For anyone anticipating the outcome of the spinoff of Altria Group Inc.'s Philip Morris International tomorrow, the best part may be the worst part. Philip Morris International, the biggest chunk of the Marlboro cigarette franchise, provides 75 percent of Altria's revenue and two-thirds of the profit and is "a pretty easy choice," said Donald Yacktman, who oversees $1 billion as president of Yacktman Asset Management in Austin, Texas. The firm owned 61,704 Altria shares as of Dec. 31. The spinoff's goal is to grab more smokers in developing markets, where the habit is on the rise and increasing wealth is spurring purchases of Marlboro, the world's top-selling brand. "If you have a 5- to 10-year view, the stock you'd want to own is Philip Morris International," says Brian Barish, who manages 4.5 million Altria shares as president of Cambiar Investors in Denver. The firm oversees $8 billion in assets. "There's growth in big, populous countries like China, India, Indonesia and Thailand," Barish said. "In the U.S., tobacco use has been in secular decline for multiple decades." Altria's overseas shipments advanced 2.2 percent last year to 850 billion cigarettes and accounted for 16 percent of all the smokes sold worldwide. That contrasts with a U.S. drop of 4.6 percent as smoking bans and higher prices crimped demand. The American side of the company shipped 175.1 billion units. Fewer Restrictions Philip Morris International will accelerate growth in markets where there are fewer smoking restrictions and anti- tobacco lawsuits than in the U.S., investors say. The company "won't have to worry about getting pre-approval from the U.S. for things that are perfectly acceptable in foreign markets," said Thomas Russo, who manages more than $3 billion, including 5.7 million Altria shares as of Dec. 31, at Gardner Russo & Gardner in Lancaster, Pennsylvania. As of Feb. 15, the international unit was defending itself against an estimated 133 suits claiming products harmed individuals, Altria said in a regulatory filing. Altria faced 111 suits on behalf of individuals and 2,622 cases brought by airline flight attendants alleging they were injured by second-hand smoke, the filing said. Shareholders in Altria will get one share of Philip Morris International for each one they owned March 19. The spinoff will trade under the ticker symbol "PM" starting March 31. 'When-Issued' Shares So far, the Lausanne, Switzerland-based company has underperformed Altria. Through yesterday, Philip Morris International had advanced 2.6 percent since March 17 when the stock started trading on a "when-issued" basis. When-issued shares of Altria have risen 8.9 percent. The new Altria is undervalued relative to U.S. rivals Reynolds American Inc. and UST Inc., said Nik Modi, a UBS Securities LLC analyst in New York. He rates the new Altria shares a "buy." According to Bloomberg data, the overseas company trades at a higher price-to-equity ratio than British American Tobacco Plc, signaling it's fully valued against its European competitors. Altria may rise to $29, or 27 percent higher than today's closing price for the when-issued stock, said Judy Hong, a Goldman Sachs Group Inc. analyst in New York. Her 12-month price target for Philip Morris International is $58, or 14 percent more than today's when-issued closing price. The international company's when-issued shares climbed 38 cents to $50.68 at 4:03 p.m. in New York Stock Exchange composite trading. Altria's when-issued stock rose 42 cents, or 1.9 percent, to $22.92. The current Altria shares gained 22 cents to $73.22. Not Yet Rated Hong had recommended buying the current Altria. She hasn't yet rated Philip Morris International or the remaining U.S. company. The inclusion of the international company in the Standard & Poor's 500 Index may help the stock as fund managers who mimic the index buy the shares, said Giri Cherukuri, who helps manage $1.2 billion at Oakbrook Investments LLC. The Lisle, Illinois- based firm owned 61,100 Altria shares as of Dec. 31. Altria has outperformed the S&P in each of the past eight years, returning 23 percent annually on average, eclipsing the index's advance of 1.1 percent. As the fastest growth goes overseas, the U.S. company plans $1 billion in cost cuts while boosting sales of smokeless tobacco products as Americans consume as much as 2 percent fewer cigarettes a year. The company, which is relocating to Richmond, Virginia, from New York, makes half of the cigarettes sold in the U.S. It plans to buy back $7.5 billion in stock over the next two years and pay an estimated $5.4 billion in dividends. It projected an annual shareholder return greater than 12 percent. Buybacks, Dividends Over the next two years, Philip Morris International plans to spend about $21 billion on buybacks and dividends. It hasn't forecast a total return to shareholders. Altria's board approved the timing of the split in January. It comes a year after the company spun off its 89 percent stake in Kraft Foods Inc., the world's second-largest food company. Barish and other investors favored the breakup, first mentioned by Chief Executive Officer Louis Camilleri in 2004, as a way to focus Altria's Philip Morris USA on boosting Marlboro's 41 percent share of the U.S. market while expanding into snuff and cigars. Clover Capital Management, which oversees $2.5 billion, will receive about 250,000 Philip Morris International shares tomorrow. The Rochester, New York-based firm will keep those and its 250,000 Altria shares and "see how things play out with respect to each business," said Matt Kaufler, a portfolio manager. "I would bias toward the international side," he said. "It has the ability to sell more cigarettes over time." Enditem