DD: <<When you buy MO, you are paying for KFT and SAB Miller. Tobacco assets are valued at close to zero>>The flaw in this thesis is that the liability doesn't have to stop with the value of the tobacco assets. Many of the companies bankrupted or nearly bankrupted by asbestos litigation had acquired the liability by buying some tiny business way back when...in many cases the liability arising from that purchase dwarfed the original acquisition. Consider that asbestos production essentially haulted over 25 years ago and no one, as far as I know, is accusing asbestos defendents of marketing to children or intentionally misleading consumers...most were just using something that turned out to be dangerous and they stopped using it when that was determined. By contrast, the tobacco co's are easily portrayed as evil incarnate: Marketing to children and misleading the public about health effects...in short, a target. What's amazing isn't that they're under attack so much as that they've survived this sort of attack for so long.
If it wasn't for tax, regulatory and litigation risks, MO would be a great value, but to assume those risks away is to ignore THE critical element of the investment picture.
Here's a quote from a fund manager that sums it up:
Kevin Rendino Merrill Lynch Basic Value Fund
thestreet.com
8. Every value investor out there has an opinion about Philip Morris (MO:NYSE - news - boards), with that beaten-down stock price and the fat dividend. What's your take?
Rendino: We've done a wonderful job of losing money in Philip Morris. When I took this fund over [in July 1998], I actually sold out the position.
Philip Morris is always going to be a cheap stock. It's always going to have a fat dividend yield. It's always going to look attractive on a price-to-earnings ratio and a price-to-cash flow ratio. But you really DON'T WANT TO GET INVOLVED IN A COMPANY THAT'S FACING A MYRIAD OF LAWSUITS BECAUSE YOU CAN'T ANALYZE THOSE. I have a team of five to six people who work with me on these funds, and WE'D NEED 50 TRIAL LAWYERS AROUND THE COUNTRY STOCKED IN EVERY COURTHOUSE, waiting to see what the next lawsuit's going to bring down. I DON'T HAVE THE TIME AND ENERGY to do that, and I JUST CAN'T ANALYZE THE COMPANY. |
