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

To: md1derful who wrote (2437)	10/1/1998 10:00:00 PM
From: Geoff	Read Replies (1) \| Respond to of 6439

This is a post I placed on the Motley Fool's MO Board on AOL (with a little extra for this board) -- md1 et al... "Impressed" is hardly the word I would use for today's price action. "Amazed" is more like it. I really think that MO is determined to break out this time, but before it does it wants a settlement to buoy the price of 48 as a strong support. Anyway, we've been over that before. Now on to the original post... All of us in here expect MO to break out big, and based on today's excellent price action, I would think that MO is set to go, and is simply waiting for the news we've all been waiting for, that there is a new settlement. Defensive is the call of the wild down on Wall Street, and it doesn't get much more defensive than cigs, beer and pre-processed food! But enough with the humor... let's see where MO will be post-settlement, based on MO's comments on the original national tobacco settlement that went to Congress only to get caught up in the muck. Here's a little from MO's 1997 annual report regarding the old settlement (that got killed by McCain) and how things were to be paid... Page 58: The Company anticipates that PM Inc.'s share of the industry's $10 billion initial payment... would be approximately $6.6 billion (adjutsed downward for initial payments made to Mississippi, Florida and Texas) Well, since we've also settled with Minnesota, does the settlement currently being negotiated exclude these 4 states since they've already settled? I would think so because I've read that the current settlement is for "the remaining 46 states". Page 58: The initial payment would have a material adverse effect on the Company's operating income and cash flows in the quarter and year in which the proposed resolution is enacted and on its financial position. If memory serves, MO already restated past Qs earnings to reflect the charges for a few, or all, of those 4 states, right? So, it looks like we'd take a "one-time" charge upon the successful implementation of a settlement with the remaining states. I can live with that, one-time charge in exchange for some major legal certainty. Page 59: The Company anticipates that PM Inc.'s share of future annual industry Payments related to cigarette sales would be charged to expense as the related sales occur, and would be funded through price increases... The Company believes that implementation of the proposed Resolution would materially adversely affect the volume, operating revenues, cash flows and/or operating income of the Company in future years. Okay. We already know that as price increases by certain increments, then there is a small decrease in smoking, at least domestically. The problem I see with the current state settlement is how in the world to enforce a uniform price increase? A federally mandated settlement would have imposed a federal "tax" on cigarettes in order to fund the settlement. Without the centrality of the federal government, creating and maintaining a uniform "tax", or price increase, on cigarettes is going to be very difficult. However, I remain confident that a mechanism will be created to maintain such "tax" parity. All in all, we're looking at a one time charge for initial payments, then a price increase (likely to be phased in a nickel or dime at a time to ease prices higher instead of a dramatic pop in price) to fund the settlement. At least domestically, volume will decrease slightly, but with MO's market share momentum of gaining about 1% per year, we're looking at possibly controlling 60% of the domestic tobacco market in a decade. And we've seen several analyst reports and article that contend that once marketing restrictions,which are very likely, kick in that current market share trends continue -- thus the current domestic price war. With that said, I am wholly convinced that MO will turn out to be the big winner in the end -- regardless of what happens to its peers. Finally, Choo choo baby! later, geoff