It's amazing what a little good news will do for a stock, especially a beleaguered tobacco giant. Investors have flocked to Altria (NYSE: MO ) stock following Chairman and CEO Louis Camilleri's announcement of a prospective breakup, driving the shares up nearly 20% in less than three weeks.
Breaking up the company would be a boon to shareholders, unlocking the pent-up value in the tobacco operations. Camilleri told investors that the company's tobacco businesses were significantly undervalued and the company was already preparing to split, once the major legal matters facing Altria are resolved. Poor performance at Kraft Foods (NYSE: KFT ) , coupled with an uncertain legal climate, has Altria's stock trading at a significant discount to its three largest tobacco competitors: British American Tobacco (NYSE: BTI ) , Imperial Tobacco (NYSE: ITY ) , and Reynolds American (NYSE: RAI ) .
Let's take a quick look at the value in the tobacco operations. By virtue of public stock markets, we can estimate Altria's 85% stake in Kraft at $49.5 billion, and the company's 36% SABMiller stake at roughly $6.8 billion (at an exchange rate of 1 British pound = $1.8535). That leaves a value of about $63 billion for the company's tobacco operations, or about 6.2 times 2003 operating earnings. Comparing Altria's tobacco multiple to British American's 9.7 times operating earnings, or Reynolds American's 14.8 times recurring operating profit, leaves plenty of room for multiple expansion in the tobacco operations.
Of course, none of this happy talk is a done deal. Camilleri was clear that the split wouldn't occur unless Altria's litigation worries clear up, and the company still faces three significant hurdles before it can go forward. The two class action suits appear to favor Altria, with an early victory in the Engle case likely to be upheld and the Illinois Supreme Court likely to decertify the Price/Miles case. The U.S. government lawsuit (an outrageously improper use of the RICO statute) is the most serious, as it seeks disgorgement of the company's historic profits, but recent comments by an appellate panel reviewing the claims bode well for Altria.
Camilleri's public disclosure of this major strategic move indicates positive expectations at Altria. My guess is that the giant splits into Philip Morris USA, Philip Morris International, and Kraft Foods, allowing each company to focus on its core businesses while relieving the international tobacco operations of residual legal liabilities related to U.S. operations. It looks like shareholders who held through the ups and downs of recent years are finally going to be rewarded.
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Fool contributorChris Mallonowns shares of Altria through his private investment partnership.