FOOLISH FOUR PORTFOLIO

<FOOLISH FOUR PORTFOLIO>

MO Crashing and Burning?
Is tobacco giant going up in smoke?

by Ann Coleman
(TMF AnnC@aol.com)

Alexandria, VA (April 9, 1999) -- The Dow's Bad Boy, Philip Morris (NYSE: MO), has taken a beating since the beginning of the year. It was excluded from this year's Foolish Four but is still in quite a few folks' Foolish Four portfolios that were started at various times last year, and they are not happy campers. Let's take a look at Philip Morris's prospects. Not that I have a crystal ball, mind you, but there are some pretty obvious things to consider when trying to decide if it is time to bail out.

Every man-made rule has its exceptions. Flip Mo may be at least a partial exception to the rule that it is earnings that drive price. But even though it is tempting to blame the company's recent dive on the successful tobacco lawsuits, doubts about earnings have also figured into the picture. Recent price increases to help pay for the settlement between the tobacco industry and 46 states have reduced US tobacco consumption, and the possibility of increased federal taxes and regulation have threatened earnings growth as well.

Of course, there are lots of other countries in the world just full of people waiting to be addicted, and this has not gone unnoticed by US tobacco companies. I am not going to go into the politics or morality of selling an addictive and deadly substance to people who can't read the warning labels, if there even are warning labels. (You'd never guess which side I'm on, would you?) No, let's not go down that road. It's been done.

Let's just look at this from the standpoint of an investment. The company is rolling in dough. Analysts are estimating a 13% increase in earnings next year (although if the fears mentioned above come to pass, there would be the possibility of earnings estimates revisions).

Flip Mo has dropped 40% from its high last November. Right now the company is selling very near its 12-month low, with a P/E of 15 and a dividend yield of 5.2%. Compare that with Procter and Gamble (NYSE: PG), selling at a P/E of 37 with a dividend yield of 1.02%.

Could it get worse? Oh, sure. Three years ago the company was selling for less than $30 (price adjusted for a 3-for-1 split in early 1997). But then again, it is hard to imagine how much lower the company can go. Even with the whole tobacco division valued at 0, one can make a pretty good case that the rest of the company is worth more than it is selling for right now.

If I were a Philip Morris shareholder, I would be hoping that the company would spin off the tobacco division and that some deep pockets would take the tobacco portion private. How realistic that scenario is, I don't know, but it would certainly liberate the non-tobacco businesses and be a boon to stockholders.

Meanwhile, the company increased its dividend last year and is now yielding more than my money market fund. That kind of payout will attract buyers when they are reassured that the company is not going to be put out of business by the cloud of second-hand smoke hanging over it. I probably won't be one of them, but then again, a 5% return (and the possibility of a spin-off) is tempting even to one who is about as antismoking as you can get. Those who are less scrupulous might well jump in with both feet at some point, dragging the price back up to merely cheap.

Monday: How did some investors get into this mess? What happened to the Foolish Four's protective mechanism?

Fool on and prosper!



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Today's Stock Lists | 1999 Dow Returns

04/09/99 Close
Stock  Change   Last
--------------------
CAT  +   1/8   48.75
JPM  -1  1/4   128.75
MMM  -   1/2   71.19
IP   +   1/4   44.1
                Day   Month    Year   History
        FOOL-4   -0.22%   3.98%   6.93%   8.52%
        DJIA     -0.23%   3.96%  11.20%  10.75%
        S&P 500  +0.33%   4.82%  10.01%  10.27%
        NASDAQ   +0.76%   5.33%  18.26%  19.88%

    Rec'd   #  Security     In At       Now    Change

 12/24/98    9 JP Morgan    105.51    128.75    22.03%
 12/24/98   24 Caterpillar   43.08     48.75    13.16%
 12/24/98   22 Int'l Paper   43.55     44.19     1.46%
 12/24/98   14 3M            73.57     71.19    -3.24%


    Rec'd   #  Security     In At     Value    Change

 12/24/98    9 JP Morgan    949.62   1158.75   $209.13
 12/24/98   24 Caterpillar 1034.00   1170.00   $136.00
 12/24/98   22 Int'l Paper  958.12    972.13    $14.01
 12/24/98   14 3M          1030.00    996.63   -$33.38

              Dividends Received      $15.04
                             Cash     $28.26
                            TOTAL   $4340.80

</FOOLISH FOUR PORTFOLIO>