Sell Shares of Altria Group
Altria Group, Inc. (MO) is the leading domestic tobacco company. The company generates significant cash flow and has a high dividend yield. However, the company is engaged in numerous tobacco liability suits. Several large punitive damage awards have been upheld by appellate courts, especially the $50 million judgment paid out in the Boeken case after the U.S. Supreme Court refused to hear the case.
In addition, potential negative litigation is expected in Canada. Finally, weak volumes in the Germany and Poland are concerning. On January 31, 2008, management announced that Altria and its subsidiaries have commenced tender offers to purchase $2.6 billion of notes and debentures and approximately 1 billion of bonds. In order to finance the tender offers, Altria has arranged a $4 billion 364 day credit facility. The company intends to access the public debt market to refinance credit facility after the spin-off.
Altria's stock has traded in a P/E multiple range of six to 18 over the last 10 years. The stock has maintained a low P/E due to tobacco-related litigation issues, and has been pressured down to a single-digit P/E during times of court case losses. We expect Altria's stock to trade in a P/E multiple range of 12 to 16. The target price of $69 is 15 times our mid-year 2008 earnings estimate (six months forward). The stock is rated a Sell.
Neutral on Cooper Tires Outlook
Cooper Tire & Rubber Company (CTB) specializes in the manufacture and marketing of automotive products. Focus on improving product mix and lower costs are likely to improve the earnings prospects of the company in the long-term. The company is working constantly to increase its capacity in order to meet the rising demand for replacement tires in the high performance and ultra-high performance categories.
The company operates in a very competitive environment with 15% market share of all light vehicle replacement tire sales in the United States. CTB is also losing market share in broad-line sales. Moreover, high gasoline prices have resulted in lower demand for the replacement tires.
For the full-year 2007, the company reported diluted earnings per share of $1.91, compared to a loss of $1.28 per share in 2006. Total revenues were up 13.9% to $2.9 billion from the year ago period. Sales in North America increased 10.8% to $2.2 billion while International sales increased 29.6% to 8.8 million. The company repurchased three million shares for $46 million in 2007.
However, a challenging North American auto environment makes us rate the stock a Hold with a six-month target price of $19. Currently, CTB is trading at 11.5x our 2008 EPS estimate of $1.58. Initiatives taken by CTB to improve its product mix and cut costs will help the company restore margins in the future. Thus, we rate the stock a Hold with a six-month target price of $19.
