Wednesday, October 28, 2009

MO Money

The number of good ideas crossing my desk has dwindled as the market marched higher in recent months. We are once again living in a GAAP world. I'm not referring to "Generally Accepted Accounting Principles", but "Growth At Any Price". Just witness the insanity surrounding Amazon and even Visa.

Aggregate levels of earnings are again irrelevant. It's all about growth rates. It's an old story. Wall Street perpetually overvalues companies with outsized growth (however transient) and undervalues those with low, no, or (God forbid) negative growth.

In addition to some legal issues, this dichotomy was why Altria (MO) separated itself from Philip Morris International (PM). PMI was the "growth" vehicle and Big MO was slow and steady.

Personally, I think the decision to break up the company was silly. In essence, Altria bought into a Wall Street lie. I don't see the value creation, but I do see an opportunity.

True to form, Philip Morris International has garnered most of the attention post spin-off. The story has already been written. MO is in perpetual decline. PMI is where the growth is. Case closed. Or not.

I'm not as anti-PMI as I am pro-MO. It is the better buy. The company closed on its purchase of UST in January. As much as I hate the word, this is a "transformational" transaction. UST is the largest purveyor of smokeless tobacco with brands like Copenhagen and Skoal.

The price was steep: over $10 billion. And Altria paid cash, refusing to issue equity to do the deal. Before the deal, MO had essentially no net debt. Now: around $10 billion. Not a coincidence.

But Altria has one MASSIVE hidden gem. You rarely hear about it in the financial press. And even MO doesn't say much about it. Long-term holders of Altria remember Miller beer very well. It was sold to South African Breweries back in 2002. Nonetheless, Altria still owns a stake in SAB Miller... a BIG one!

Altria owns 430 million shares of SAB Miller. That's 27.37% of the total outstanding shares. The stake has been so overlooked (for so long) by investors that I actually started to wonder if it was a personal illusion.

Thankfully, SAB Miller's helpful investor relations department confirmed the MO stake and its current value of 7 billion pounds.

No need to flip to Bloomberg: 7 billion pounds = $11.5 Billion

To put this equity stake in perspective, it represents 31% of Altria's market value of $37 billion! If sold, Altria could pay off most of its debt and fund sizable share repurchases.

Either way, Altria should consider a sale of the SAB Miller stake. In 2008, Altria earned around 50 cents a share in dividends from SAB Miller or around $225 million. SAB paid a 39 cent interim dividend this year, in line with 2008. If the final dividend is also unchanged, the SAB's current yield will be just 2%. SAB shares are up 53% year-to-date and look fully valued to this analyst. Will Altria sell? I hope so.

Altria also inherited a wine business when it bought UST. This is another distraction that can be readily sold. I don't have enough information to value this business, but the point is that Altria is a goldmine of hidden assets.

I'm calling for a new temperance movement at Altria. It's time to sell out of wine and beer and reallocate the capital elsewhere.

Of course there will be tax consequences, but by any value measure Altria looks a lot better when the full weight of its "liquid" assets are appreciated.

Disclosure: Author owns shares of Altria.


  1. What interest rate was the 10 billion financed at? Personally with all the printing of money I except inflation. If this occurs having some cheaply financed debt could be advantagous.

  2. Any chance you can add the email subsciption feature to your website so new entries are automatically emailed? Its simple to add. You have a great blog. Just can't always remember to add it to the rotation.

  3. My email by the way is if you want to email me directly.

  4. Don't have the interest rate information at hand, but it wasn't a ridiculous interest rate. To clarify, I am not arguing that MO should pay off its debt. Just that it should sell SAB. What to do with the proceeds is secondary.

  5. First, in response to the question about the interest rate for the debt incurred to finance UST, it's right around 10%, which in my opinion, is rediculus. The UST acquisition was financed during the worst part of the credit meltdown. Today, far lower quality companies can finance at 7%.

    Regarding SABMiller being "hidden"... I don't exactly think it's hidden just because people don't talk about it. The equity earnings are on the books. They amount to about 25 cents per share of the $1.76 MO will earn this year. If you imagine MO selling SABMIller and paying a big, one time dividend, you are left with $1.50 GAAP earnings and a stock price thats $5.50 lower, which doesn't take into account taxes.

    Even if they were to sell SABMIller and repurchase stock, they'd end up with about $2.00 GAAP e.p.s. which would give them a P/E of 9 on today's price. Bring that multiple up a bit and you get a few bucks higher of a stock price, but I don't think it's worth it, and I feel pretty certain management isn't worried about selling SABMiller anyways. They seem to be most concerned with lowering their cost of debt, which in my opinion is what they should be worried about.

    I guess i'm just not one who thinks companies should constantly transform themselves to "unlock value".. MO is cheap, and MO should be buying back stock so long as the disconnect is there, not selling off a strategic long term investment.