sonki & all Barrons article on under 1000 pcs
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Excerpts from Barrons on tobacco stks:
The tobacco industry probably wishes it had heeded that old slogan and continued to battle its adversaries, given the legislation now taking shape in Congress. A key Senate committee backed a punitive bill last week that could cut cigarette consumption and industry profitability without giving cigarette companies the liability protection they have long craved.
Amid the gloomy legislative outlook, Philip Morris fell 2 5/8 to 40, while RJR Nabisco declined 2 13/16 to 30 1/16. Philip Morris now trades at just 12 times projected 1998 profits, its lowest P/E relative to the S&P 500 in decades. And at RJR Nabisco's current price, investors are according a negative value to its cigarette operations after adjusting for the company's 81% interest in Nabisco Holdings, the food company that makes such snack-food staples as Ritz crackers and Oreos. Philip Morris has one of the lowest P/Es of any big stock in the S&P, the highest yield in the Dow at 4%, and the index's worst performance this year.
"I haven't liked the settlement since the day it was born," says John Maxwell, an analyst at Davenport & Co. "When you open a Pandora's box, you don't know what will come out." The industry last June made its famous pact with state attorneys general and other foes to pay $368.5 billion over two decades in return for liability protection. The industry was betting that its legal battles finally would end, paving the way for higher price/earnings multiples for the stocks.
Wall Street initially cheered the deal, sending Philip Morris up to a record 48. But what investors didn't figure was that Congress would move to increase the penalties -- a current proposal calls for $600 billion -- without providing immunity from class-action lawsuits. The cigarette firms may succeed in derailing the bill in Congress or drop out of the process altogether. RJR Nabisco denied rumors last week that it will pull out. But if the industry walks, Congress may simply go ahead and raise excise taxes by $1 or more per pack, cutting consumption, industry earnings, and possibly creating a big black market.
Maxwell, the dean of Street tobacco analysts, Friday cut his ratings on Philip Morris, RJR, B.A.T Industries, which owns Brown & Williamson, to Underperform from Hold. He also cut his ratings on three tobacco leaf suppliers, Universal, Dimon, and Standard Commercial, as well as Schweitzer Mauduit, which makes the paper used to wrap cigarettes.
"It would appear that our worst fears have been realized with the tobacco bill now going through Congress," he wrote. Maxwell says if excise taxes are raised, the price of a pack of cigarettes, now an average of about $2 nationally, could hit $4 within five years, possibly cutting consumption to 15 billion packs annually from 24 billion. Low-income smokers, he says, will be hard-pressed to pay $2,000 a year to support their habit.
Many argue that RJR is a steal now because the value of its stake in Nabisco Holdings is worth about $31 per share, nearly $1 above its current stock price. The company's cigarette business, which is now accorded a negative value, is expected to generate about $3 per share in cash earnings this year.
For the past few years, the value of this RJR cigarette "stub" ranged from $3 to $11 before plunging below zero last week. RJR looks tempting, but it may be difficult or impossible for RJR to spin off its Nabisco stake under the terms of the current Congressional legislation. Those pros who bought RJR stock and sold Nabisco short to isolate the stub are facing sizable losses on their positions, and it's tough to establish a new position in the arbitrage because of the difficulty in borrowing Nabisco stock, which ended Friday at 47 « .
Philip Morris can weather any financial penalties far better than RJR thanks to its enormous cash flow. Philip Morris's shareholder-oriented management undoubtedly is considering steps to boost the stock price, including a huge share repurchase. It's worth noting that Philip Morris's food operations, including Kraft, could be worth about $25 a share, and its international tobacco business is very profitable.
All of which bears out the adage "be careful what you wish for, for you may get it." The precarious present situation of the tobacco companies owes much to the original deal, which came about largely at Wall Street's urging.
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