What are you doing reading this? Shouldn't you be out struggling through traffic, stranded in an airport somewhere, hoping the train really doesn't take as long as it seems as you travel for Thanksgiving?

Well, we're glad could join us for our pre-Thanksgiving edition of The Motley Fool Take. Savor it along with your stuffing and cranberry sauce because we won't be publishing on Thursday or Friday this week.

What?! You protest. Well, it's not like we're shutting the site down. Go read everything off our main page, or sift through our recent archives. Feeling full? You might even want to loosen your wallet along with your pants and contribute to an outstanding charity along with us.

Have an outstanding holiday, Fools. We're thankful every day that you grace us with your presence.

In today's Motley Fool Take:

Unlocking Value at Altria


Chris Mallon

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.

For related Fool analysis, see:

Fool contributor Chris Mallon owns shares of Altria through his private investment partnership.

Discussion Board of the Day: Recipes/Cooking

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Talking Turkey With Hormel


W.D. Crotty

Hey, Turkey Day is just around the corner. So, let's talk turkey.

When turkey producers come to mind, do companies like Pilgrim's Pride(NYSE: PPC) and all its turkey restructuring charges fill your mind, too? Yes, that turkey operation has been a turkey for some time, although it's starting to come back to life.

Fast forward to today's turkey feast, Hormel Foods(NYSE: HRL). Hormel might be famous for pork products and SPAM, but Jennie-O Turkey roosts at Hormel, too.

Hormel's latest quarterly earnings release shows revenue up 15%, but net income down 1% from the comparable quarter last year.

Gobbling up most of the good news was Jennie-O, with 24% of sales and 25% of operating profits. Jenny-O sales for the quarter flew up 18.3% and operating profit soared 86.4%. Leading the strong results were turkey bacon (who would have guessed?) and marinated tenders.

Laying an egg was refrigerated foods (48% of sales; 31% of operating profits). Its 19.9% sales gain looks great until you notice the 25.4% decline in operating profits. Operating margin fell from 9.6% to 6%. The company qualified this by saying that 6% margins are closer to normal, and that last year's results were atypically good.

Peck through last year's report and you'll find what management had to say: "We expect the performance of our Refrigerated Foods and Jennie-O Turkey Store segments to reflect the improvements we have made to the product mix within these segments over the last couple of years." There is no warning there about better-than-"normal" results.

One place the company didn't miss the mark was estimated earnings -- and that is what counts. Guidance for 2004 was $1.44 to $1.60 a share (up from $1.33). Even with the fourth quarter's poor profit performance, earnings still came in at $1.65 a share. Guidance for 2005 is $1.65 to $1.75 a share.

Hormel's 8.3% 2004 operating margins compare favorably to pork processor Smithfield Food's(NYSE: SFD) 3.1%. They're also above packaged-food giant ConAgra's(NYSE: CAG) 7.8%. Investors can sleep easy, too, because Hormel, compared to these competitors, has a very strong balance sheet (with a small net debt) and pays a nice 1.7% dividend.

Hormel is up 12.6% over the last 52 weeks -- in line with the S&P 500's performance. Since the stock trades at 19 times earnings, and the company expects earnings (at best) to increase no more than 6%, getting market-average returns might prove difficult.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.

Quote of Note

"Gratitude is not only the greatest of virtues but the parent of all others." -- Cicero

A Peek Into Toyland


Alyce Lomax (TMF Lomax)

After I wrote about an apparent cease-fire in the toy wars, a Foolish reader informed me that the rumors of FAO Schwarz's out-and-out demise have been just a tad bit exaggerated. Even with FAO Schwarz's slight reentry into the market, it seems it won't be much of problem for the reigning heavyweights in toys.

FAO Schwarz will reopen its flagship Manhattan store on Thanksgiving, and it plans to reopen its store in Las Vegas. But that's it -- a far cry from the many retail stores it once operated, which included the Zany Brainy and Right Start outlets. FAO Schwarz will also circulate a catalog for the holidays (which I requested, curiously, about a month ago, and received last week).

This year promises to be a bit different than all the bloodletting of the last holiday season. With FAO Schwarz just a ghost of the retail presence it used to be, and KB Toys leading a pared-down existence, giants like Wal-Mart(NYSE: WMT) and Toys "R" Us(NYSE: TOY) seem like shoo-ins to get a lion's share of the toy business. (As for online toys, Toys "R" Us still has a deal with Amazon.com(Nasdaq: AMZN), despite their domestic squabbles this year.)

Indeed, those shoppers looking for toys for tots like, for example, Mattel's(NYSE: MAT) Barbie or Hasbro's(NYSE: HAS) G.I. Joe will likely still carry on their searches at the Wal-Marts, Targets(NYSE: TGT), and Toys "R" Us outlets in their neighborhoods. FAO Schwarz won't be presenting a huge competitive risk.

Why's that? Because FAO Schwartz is adhering to its heritage and doing what it probably should have always done -- solely addressing the luxury niche through just two storefronts and a catalog. If you're looking for, say, a $9,000 Wild Zebra Rocking Horse or a $30,000 La Petite Maison Custom Playhouse for your favorite kid, FAO Schwartz is the place for you. (Hmm, OK, uh... that's insane! If you'd spend that on your little sweetheart, to each his or her own, I guess, but don't let on to the rational people on our Living Below Your Means board.)

At any rate, investors will be looking forward to seeing how it goes with toys this holiday season, considering that Toys "R" Us in particular has had its share of crises, and has even been rumored to be considering a sale of its core toy business. In the meantime, happy holidays and happy bargain hunting on Black Friday!

Alyce Lomax does not own shares of any of the companies mentioned.

Sirius Demonic Possession


Rick Aristotle Munarriz (TMF Edible)

It's great to be right. Yet being right in the market is often a temporary condition. That's why it's even more important to not be too greedy during those moments when you feel spot on. So maybe my moment of ominous humility came when I pulled up a quote on Sirius Satellite Radio(Nasdaq: SIRI) yesterday afternoon -- it was at $6.66. It closed a few pennies higher. That's just evil, chum.

Back in October, I proposed that Sirius was worthy of being considered for our new Rule Breakers growth stock newsletter. The stock closed at $3.70 a share that day. Yesterday it was trading more than 80% higher.

Yes, I am still bullish on the long-term prospects of the stock. However, now I am more than a little concerned about its near-term valuation. Sirius announced that it had lapped the 800,000-subscriber mark yesterday and it commands an $8.5 billion market cap. When XM Satellite Radio(Nasdaq: XMSR) hit that mark last summer, it was valued at less than $2 billion. Times change. The sentiment's more chipper. I get that. But then explain to me why now that XM has 2.5 million subscribers, its market cap at $7.5 billion is still less than Sirius's today?

Don't get me wrong. I think that landing Howard Stern and Viacom's(NYSE: VIA) radio guru Mel Karmazin were genius touches that will eventually find Sirius signing up more users than anyone making the SatRad migration. However, we're getting ahead of ourselves if we ignore that even with all of the buzz the signing of Stern and Karmazin has generated for Sirius, it is looking to sign up only half as many new users as XM this quarter.

It's troubling to me when I get emails from people wondering why Sirius can't catch up to XM and be a $35 stock tomorrow. The concept of shares outstanding isn't all that complicated, so it is alarming to see people buying a stock on the premise that the raw share price is lower than that of a different stock. Would these people be buying XM instead if it declared a 10-for-1 stock split? It's a haunting thought.

It's slightly less troubling but still disturbing to see folks who understand that you need to multiply a stock's price by the shares outstanding to arrive at its current market value still ignore the fact that a young company like Sirius also has a ton -- and we're talking literally a couple hundred million -- of additional shares in options and other dilution that will be tacked on as the stock appreciates.

Yesterday an analyst raised his target price on Sirius to $6.75 and that mark was struck just minutes into the trading day. A cautious Seth Jayson wondered last month if signing Stern was worth $1 billion the day that Sirius announced its $100 million-a-year deal with the notorious radio show host. A billion bucks for Stern? That's peanuts! The stock has actually tacked on nearly $5 billion since Stern came aboard.

Buying into a strong growth stock early in its life cycle is great -- it's the very basis of our Rule Breakers premium research offering. But that should never mean checking logic and common sense valuation at the door. Sirius is going to have a great future, but a cynic would be right to wonder if it's cashing too many of tomorrow's paychecks today.

Tread carefully.

Longtime Fool contributor Rick Munarriz thinks that satellite radio will be a huge industry in the years to come. He does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.

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