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Non-Tech : Philip Morris - A Stock For Wealth Or Poverty (MO) -- Ignore unavailable to you. Want to Upgrade?

To: Brian Malloy who wrote (1476)	4/26/1998 6:39:00 PM
From: men mailman	Respond to of 6439

Barrons very bullish Interview with Morgan Stanley analyst <<Q: You're identified with investing in tobacco stocks, with good reason. What's happening there? A: Let's recapitulate where we are. You had the really nice, $368 billion deal that all the attorneys general signed off on. Trouble is, you then had the health community and the anti-tobacco community saying, "We can't let the tobacco industry off this easily." That was quite amazing to hear, because $368 billion is a lot of money. Then you had the evolution into a much bigger deal, say $500-$600 billion with less immunity. And basically, the McCain bill came out and the industry was completely unable to accept it. I applaud that. I don't think it's a viable deal. The industry is at the table to get a rational environment for their business. They would like immunity from lawsuits. They've won. They've never paid out a dime. So what are we left with if this historic opportunity falls through? We're back at square one. The companies will fight you. You will raise excise taxes and sue them in courts. Now, tobacco is a great example of a group where fear gets very high from time to time. I did significantly downsize the group about a year ago. For the first time in a couple of years none of them were in my top 10, because optimism about the global settlement was too extreme, and you started having downward revisions. The industry hasn't repurchased stock for a year. So the cash is still on the balance sheet, and that's a negative to EPS. Q: It's needed for a settlement. A: Not only that, but they're in negotiations with the government, and want to sit on their hands. Q: What do you think of the tobacco stocks now? A: I've started to put my toe back in the water. They are very compelling here. I'm buying Philip Morris, Loews and RJR, in that order. I don't yet have a full position. But there's a win-win scenario that should evolve, even if settlement talks broke down. Clearly, there's a decent chance Clinton will hold a summit of the two parties. It has to be a deal that shareholders can accept, because the tobacco companies won't do it if it isn't. The government gets a lot of money. The industry gets a rational environment. On the other hand, if they can't get it together in Washington, which is totally believable, the stocks will surge. In the history of tobacco stocks, you see huge trades based on fear and greed. The only time these stocks deserved to go down was Marlboro Friday, when they said, "Hey, we have to cut prices, because the low-price brands are cutting into our profit." But this isn't anything like that. If the deal falls through, estimates will rise because people will take the $368 billion out of their numbers. Philip Morris will start buying their stock aggressively, which is very accretive to earnings. Personally, I'd rather see the deal fall through. But I'm getting much more comfortable that the downward revisions have ended and that things are actually pretty darn good at Philip Morris.

To: Brian Malloy who wrote (1476)	4/26/1998 6:41:00 PM
From: men mailman	Respond to of 6439

more barrons: <<Looking for cheap stocks? One of the few places to turn now is the out-of-favor cigarette sector. RJR Nabisco's tobacco business is now being accorded a negative value. Ditto for the cigarette operations at Loew's. And industry leader Philip Morris now trades at 38 1/8, just 12 times this year's projected profits; that's its lowest multiple relative to the S&P 500 in decades. These stocks are on the bargain counter for a reason. The industry's legal and legislative position arguably has never been worse. Moreover, profit growth at RJR and Philip Morris is slowing. Philip Morris used to crank out mid-teens profit growth. But last week it reported just a 10% rise in first-quarter operating profits, to 79 cents a share. RJR, meanwhile, had a decline in its first-quarter net. Marc Cohen, Goldman Sachs' tobacco analyst, who correctly has been cautious on the stocks, wrote recently that the "historically low P/E multiples" relative to the market are of "little comfort" given the ominous legislative backdrop and weakening profit outlook for Philip Morris and RJR Nabisco. The bulls would argue that the bad news is already discounted in the stocks. Take RJR. It trades at 28 3/8, having lost a quarter of its value in 1998. RJR owns a stake in Nabisco Holdings, the food concern that makes a cupboardful of snack foods and cereals, worth $31.25 per share, resulting in a negative $3 implied value on the tobacco business. RJR's cigarette operations are expected to generate over $2.50 in cash earnings this year. RJR trades so cheaply because investors consider it unlikely that the company will be able to spin off its 80% interest in Nabisco any time soon. Bullish analysts like Gary Black of Sanford Bernstein argue that RJR's international tobacco business is worth about $8 a share, and that RJR's stock should eventually hit 45. Loews, whose Lorillard division makes Newport cigarettes, trades at 99 7/8 after losing 3/8 last week. Loew's, a holding company run by the Tisch family, has sizable stakes in the insurer CNA Financial and Diamond Offshore, an oil-service company. The value of those two interests is about $100 per Loews share. Loews' other assets, excluding Lorillard, are worth more than $10 a share, meaning Lorillard effectively is being accorded a negative value of $10 a share. If Lorillard is worth $3 billion, Loews' asset value is $140 a share, a sizable premium to the current price. Here's the math on Philip Morris. The company's Kraft food division is worth at least $25 a share, meaning the tobacco operations are valued at just $13, about six times projected 1998 profits. This break-up analysis may not be relevant if Congress clobbers the industry with punitive taxes and profits implode. But it does highlight the asset value in an out-of-favor sector of the market. (For additional thoughts on tobacco legislation, see Trading Points.)>>