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

To: Geoff who wrote (2551)	11/1/1998 3:58:00 PM
From: Hopkins	Read Replies (2) \| Respond to of 6439

I wonder what you all think about Gary Blacks most recent assertion: "RJR likely to close valuation gap vs. Philip Morris. Since the McCain bill was defeated, RJR has not kept up with other tobacco stocks (since 6/16, MO +41% relative, UST +33%, RN +8%). We believe that at least one financial buyer will file a proxy slate prior to the November 26 deadline for next year's proxy vote (deadline 150 days from anniversary of last year's proxy statement filing). On sum of the parts, RJR is worth $43, assuming the market attaches the same multiple to the tobacco stub that it attaches to the parent today. This valuation extrapolation occurred when BAT was demerged -- BAT tobacco stub trades at same 65% relative multiple to the FTSE at which old BAT traded. On this basis, we estimate that Philip Morris is worth $61 (+17%), and RJR is worth $43 (+50%). Our concern about RJR is that all three of its businesses are in trouble. In domestic tobacco, premium shares have returned to all time low, and volumes are now declining at twice the rate of the overall market." www.tobacco.org It seems to me that Mr. Black's statement, "RJR likely to close valuation gap vs. Philip Morris" reveals that he has an implicit assumption that the relative multiple stock valuations of MO and RN should approach a state of equilibrium over time. Though I am a novice, I'm not sure I buy this theory that stocks within a given industry eventually reach a state of equality in their relative multiple valuations. If this steady state theory is true then what is the conservation law at work? In thermodynamics steady state theory has its basis in the laws of conservation of energy. Is there a law like this in the stock market? If there is such a law and it behaves like other conservation laws, then I would assume that it would also be likely that MO would drop in price or slow its growth in price while RN rises in price to efficiently realize a steady state of equilibrium. In my opinion, the problem with Mr. Black's steady state theory of industry groups is that he assumes that member stocks within an industry group are indistinguishable. That is, energy (buyers and sellers) is distributed to the group as a whole without bias shown to members of the group. If this were true then equilibrium within the group might result. But I do not believe this is true. Buyers and sellers are very bias and apply their resources discriminately. I believe people buy winners and afford much greater valuations for winners. Consider DELL vs. Compaq, Coke vs. Pepsi, MO vs. RN. I was tempted by Mr. Black's argument, but I think I'll stick with MO. But then again, maybe I'll buy a couple thousand shares just for the hell of it. HOPKINS