Drip Portfolio Report

Drip Portfolio Report
Wednesday, December 31, 1997
by Randy Befumo ([email protected])

ALEXANDRIA, VA (Dec. 31, 1997) -- Although we side stepped the question of investing in a tobacco company by only looking at the Nabisco (NYSE: NA) subsidiary of RJR Nabisco (NYSE: RN), there is no way to do this with Philip Morris. Let's just set out right now for the sake of simplicity that we are only including Philip Morris in the food analysis on a very tentative basis. This brief look at the financials of the company should not be taken as a position, one way or the other, on tobacco. Should we determine later after looking at all food companies that Philip Morris looks attractive, we will then deal with the potential ethical issues.

Philip Morris (NYSE: MO)

Description: Although best known for tobacco, Philip Morris is also a gargantuan food company, deriving almost half of its $71.5 billion in trailing revenues from food and beer. After the cash acquisition of General Foods in the '80s, Philip Morris has moved strongly in the food area by consistently acquiring high-quality food brands throughout the world. Number two ranked brewer Miller Brewing Company is also a decent-sized part of the company's product portfolio.

Major brands include: Kraft, Velveeta, Cracker Barrel, Philadelphia cream cheese, Cheez Whiz, Oscar Meyer, Louis Rich meat, Lunchables, Claussen, Maxwell House, General Foods International Coffees, Post cereal, Miracle Whip, Kool-Aid, Tang, Capri Sun, Crystal Light, Country Time, Tombstone frozen pizza, Digiorno pastas, Jell-O, Bull's Eye, Cool Whip, Stove Top stuffing, Minute Rice, Log Cabin syrup, Shake 'N Bake and Taco Bell grocery products.

Core Moneymaker: Although food is very important to the bottom line at Philip Morris, the company's fastest growing and most profitable businesses are the international tobacco operations.

Financials: Because this is an overview, we'll only look at a few key things: How is the company priced relative to sales, earnings per share, and the expected growth rate (valuation)? What are the current operating (margins)? How much long-term debt does the company have (leverage)? And what does management do with the cash that it generates (capital allocation)?

Valuation, Growth, and Share Performance: At $45 1/4 per share, the market cap of Philip Morris is $109.7 billion. With trailing sales of $71.5 billion, the company trades at 1.53 times sales. In spite of the fact that food accounts for less than half of the sales at Philip Morris, the company is the largest food company we have yet covered, I believe.

Philip Morris has $779 million in cash and $12.4 billion in long-term debt. Any acquiring company would consider the cash and debt in its valuation of Philip Morris, so we subtract the cash and add the debt to the market cap to get a more accurate value for the company -- the enterprise value. The enterprise value of Philip Morris is closer to $121.3 billion, and that value in relation to sales is 1.7. This is much lower than what we have seen at other food companies.

Philip Morris booked $2.67 in earnings per share over the last four quarters, giving it a price/earnings ratio of 16.9. The company is expected to earn $2.94 per share in 1997 and $3.32 per share in 1998. The stock trades at 15.4 and 13.6 times those estimates, respectively.

Margins Reviewed: Philip Morris had $12.0 billion in operating profits in the last 12 months, which means that when you divide this by the $71.5 billion in revenues over the same period, operating margins were a phenomenal 16.7%. These operating margins were boosted significantly by the tobacco operations, although the profit margin on domestic food is also relatively impressive given the brand dominance Philip Morris enjoys in most product categories.

Leverage reviewed: With $12.4 billion in long-term debt and $71.5 billion in sales, Philip Morris has a 17.3% debt-to-sales ratio.

Capital allocation: The company pays an impressive 3.6% dividend, which is pretty much the highest dividend available from a food company right now. The company also repurchases stock like it is going out of style, spending about the same amount it pays out to shareholders for dividends on systematic stock repurchases. The company has always been very tactical about capital expenditures and has benefited from the wonderful economics of the food business where factories can profitably produce for years without requiring refurbishment.

The Snapshot for Philip Morris:

Ticker: MO
Recent Price: $45 1/4

Trailing 12-month sales: $71.5 billion
Trailing 12-month oper. earnings: $12.0 billion
Operating Margins: 16.7%
Trailing 12-month EPS: $2.67

Fiscal '97 EPS estimates: $2.92
Fiscal '98 EPS estimates: $3.32

Valuation:
Enterprise value to sales: 1.7
Current P/E: 16.9
P/E on 1997 EPS: 15.4
P/E on 1998 EPS: 13.6
Yield: 3.6%

Conclusion: While there is no conclusion yet about which food stock we are goint to add to the Drip Portfolio, on a pure numbers basis Philip Morris looks very interesting. Jeff and I will decide in the coming days as we finish up the food survey whether or not to risk the great debate involved in bringing this company into the Food Winner's Circle, let alone into our next round of considerations.

Johnson & Johnson Update: We'll add $100 to the portfolio on January 1 and send our check for $50 to Johnson & Johnson on January 2, hoping to make the January 7 investment date. (It turns out that the 7th is the monthly investment date, not the 10th; the 10th is the date on dividend payment months, usually.) Once we have the schedules down sharp, we'll be early all the time. No problem.

Best wishes in '98.

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TODAY'S NUMBERS

Stock   Close    Change
INTC  $70 1/4    -1 7/16
JNJ   $65 7/8    -3/8 

            Day        Month      Year      History
Drip        (1.02%)   (4.70%)   (14.84%)    (14.84%)
S&P 500     (0.04%)    1.57%     31.01%       2.01% 
Nasdaq       0.31%    (1.89%)    21.64%      (1.47%)


Last Rec'd    Total #    Security    In At    Current
 12/01/97      6.082       INTC     $81.346   $70.250
 11/14/97      1.000       JNJ      $62.125   $65.875


Last Rec'd  Total # Security  In At    Value   Change
12/01/97    6.082     INTC    $494.72  $427.24 ($67.48)
11/14/97    1.000     JNJ     $62.13   $65.88   $3.75 

Base:  $1003.88
Cash:   $393.63**
Total:  $882.86