Altria Group, Inc.
Investment Notes
MO
 

January 11, 2006

1. Bonds are listed as Baa2/BBB , which is “lower medium grade.”. 8 year bonds are yielding around 5.82%. As you can see, the 10 years were yielding 7% May 2004. Kraft bonds are Moody's A3 and S&P BBB+.



2. Interesting table

Hence if you put PV at $37,500, annual flows of $12,000, 10 years, 6% growth, you get FV of $225,326

If you then use FV of $225,326, 10N, PV 157,472 (Current EV), the annual return would be 3.648%.

Doesn't seem worth owning. I am selling, based on the value not being what it once was, as well as for the difficulty I have in even owning this position. Unfortunately, we will have to suck up the LTCG.

Be well everyone, hope you all have a wonderful 2006. I'm off to a good start, with lots of skiing, mega running, some new ideas, and old ideas. Going to smugglers notch VT for 5 days and I cant wait!

 

May 27, 2004

1.    On May 19, 2004, MO reaffirmed F2004 guidance of $4.50 - $4.60 of eps.  This includes potential charges of $0.11 for the international tobacco agreement as well as the Kraft restructuring charge.

2.    On May 19, 2004 MO mentioned that cash flow from 2004 - 2008 would be approximately $56B.  Emphasized that the only cash flow from Kraft and SABMiller is from dividends. 

3.    On May 19, 2004 MO mentioned that they were looking to reduce debt in the future.

4.    On May 26, 2004, see note below, item 4.  We have changed our assumptions to read as follows, " 5% eps growth rate, 4.50 F2004, 4.73 F2005. Intrinsic Value in year 5 would be $77.51.  Current intrinsic value would be $63.70.  Keep in mind that if growth rate was brought down to 2%, starting with F2004 eps estimate of $4.50, then intrinsic value would be reduced to $43 currently and $47.50 in year 5. 

        To expand on a 2% hypothetical growth rate and changing the long term 30 year corporate bond rate from 5.75% to 6.50%, the current intrinsic value would drop to $38 currently and $41 in year 5.  It will be interesting to see how eps will fare based on currencies, inflation, retirement plans (including health, welfare and pension). 

5.    Miller Brewing bonds are rated Baa1/BBB+.  Current YTM on 8/15/08 is 4.23%. 

6.    Looking at SAB Miller the following is quickly noted for F2003:

        A.    ROE has dropped to 9.4%.  We have seen this reduce drastically. I would have to disect the numbers to see the reason. I suspect that equity rose considerably when this was spun-off.

        B.    All margins seem to be  contracting over the last 5 years.

        C.    Interest Coverage Ratio is around 6X.  This is down from 13X in 2001.  Again, I suspect, but have not confirmed that this is due to spin-off.

7.    Click here for a list of beer brands. 

8.    SABMiller claims to be one of the largest bottlers of Coca Cola in the world.

9.    SABMiller claims to be focused on increasing credit rating.

10.    Most recent analysis shows that SABMiller is operating on all cylinders. Higher than expected F2004 profits and operations.  China and Russia are becoming more significant.  Price increase has not seemed to have an effect on volume.  We read a number of analyst reports who do not feel F2004 growth is sustainable.  Interest coverage ratio improved to 8.2X for F2004, according to preliminary financial announcement on May 20, 2004.

May 26, 2004

1. Bonds are listed as Baa2/BBB , which is “lower medium grade” . 10 year bonds are yielding around 7.00%. Kraft bonds are Moody’s A3 and S&P BBB+. MO owns 84% of Kraft. For link to bond ratings explanation see http://www.rbcpa.com/LongTermbondratings.html

2. Smith Barney rates it Buy, high risk as of April 28, 2004 and that stands through today’s date. They also mention that LTD/Capital is 45.8%. Expects price increase during 2004, yet maintaining eps ests.

3. Interest Coverage ratio according to Value line is 11.8, I computed at 13.8, hence Value Line more conservative. Doesn’t seem too bad.

4. Intrinsic Value showing at about 74 per share. Potential continued staple in all portfolios. Using 6% eps growth rate, 4.75 F2004, 5.20 F2005. Intrinsic Value in year 5 would be $97. See http://www.rbcpa.com/favoriteratiosandformulas.html for explanation of formula. This has been altered downwards on May 27, 2004, see item 4 above on that date.

5. EPS according to several sell side reports, were boosted by currencies. Currency gain was $243M.

6. Our growth rate is arbitrarily less than the streets. I am doing that for conservatism and lack of intimate knowledge. See part 4 for our assumptions.

7. On April 20, 2004, Merrill considers yield to be “secure”. Values tobacco stub to be $31.88. thinks dividend will be raised in 8/04 to 2.88%.

8. Prudential on April 20, 2004 felt that the food business of Kraft was the greatest risk to earnings. Target is $54. Mentions concerns at Kraft and currency aided results.

9. 2003 annual report indicates that pension plan is 70/30 equities to bonds. Investment grade constitutes over 80% of fixed income portion. In 2002 equities were 61% and 2003 they were 71%. Assumptions of return on plan assets, in my opinion quite high at 9.0% and discount rate of 6.25. Health Care cost included an 8.9% current health care cost trend rate and ultimate trend rate (f2006) of 5.0%. Something to watch. Altria plans on contributing retirement plan amounts that are deductible by IRS. They expect that to be $100M in F2004.


10. Long term debt as of 12/31/03 was 21,163, stockholders equity was $25,077, hence LTD/Equity is 84.39% This is a surprisingly better number than the past, primarily because equity has increased considerably in F2003. $1,373 of the increase was from currency adjustments, and $464 from pension liability adjustments.


11. The company has negative tangible book value


12. Leasing exposure from financing division looks complicated.


13. I didn’t see the amount of options exercised and how much that increased cash flow. Interesting that isn’t broken down in Statement of Cash Flows.


14. Would like to know fair value of land and buildings, since balance sheet is at historical cost.


15. Interesting grid on page 65 of 2003 annual report which details litigation.


16. Kraft subsequent event will require $1.2B of pretax charges over next 3 years, half of which will require cash payments.


17. SAB Miller is accounted for under equity method. Looks like minority share of earnings was $405m. The investment of $2.1B is in “other assets” section of the balance sheet.