Philip Morris International Spin-off – An Analysis.

Altria (MO), the world’s largest tobacco company is spinning off its international business. The table below lists some details of the PMI spin-off per their spin-off information sheet:

PMI share distribution date	March 28, 2008
Record date	March 19, 2008 5PM ET*
Tax treatment	Distribution is tax-free for US holders**
Ticker Symbols of Altria & PMI after spin-off	Altria - MO, Philip Morris International - PM
Distribution Ratio	1-1: one share of PM for each share of MO held
Market Share of PMI after spin-off	15.6% of International Cigarette market
Shares distributed	2.109B
Altria’s interest in PMI after spin-off	None
Planned PMI dividend	0.46c per quarter
Altria business structure after spin-off	100% of PM USA, Philip Morris Capital Corporation, John Middleton inc., and 28.6% of SABMiller plc

• * It is expected that the Distribution will be tax free in Canada and Sweden, but subject to tax in Denmark, France, Germany, Ireland, Japan, the Netherlands, Norway and Switzerland.
• ** “When issued” (MO-WI, PM-WI) trading on both shares have started already.

As of yesterday, the “When issued” shares were trading in the range of $23 and $51 for Altria (MO-WI) and Philip Morris International (PM-WI) respectively. The financials of the businesses from their latest 8-K filings is summarized below:

Metric	Combined	Altria (MO)	Philip Morris International (PM)
2007 Net Earnings per share	4.28	1.50*	2.78*
Price per share	74	23**	51**
P/E Ratio	17.29	15.33	18.35
Dividends per share	3.0	1.16	1.84
Current Yield	4.05%	5.04%	3.6%
Projected Earnings growth rate (2008)	NA	9-11%	12-14%
Projected Average Earnings per share (2008)	NA	1.65	3.14
Projected Forward P/E (2008)	NA	15	16.24

• *Illustrative.
• **”When Issued” basis as of yesterday.
• Actual spin-off allocation percentage is 30.5:69.5, when using the closing price following the day of the distribution as the calculation method (3/31/2008).
  

The shares are priced at the projected forward P/E ratios of 15 and b16.24 respectively for Altria (MO) and Philip Morris International (PM). The valuation is fair given the guided earnings growth rates stand at 9-11% and 12-14% respectively. Committed shareholder friendly management is an enormous strength for the company. This is amply demonstrated by the fact that despite total cigarette volumes going down over the years, the company has managed to increase earnings consistently.

For Philip Morris International (PM), the primary risks to the business are susceptibility to excise tax increases by foreign governments, price competition, and raw material cost increases. Opportunities for margin improvement, vast untapped potential markets of China and India, and growing through acquisitions are all promising. For Altria (MO), the primary operational risk is the regulatory environment. On the litigation side, one major risk remaining is supreme court’s decision on the Lights class-action: the supreme court is expected to rule on whether federal law preempts the claims in its entirety in 2009. Cost cutting measures, domestic acquisitions, improving regulatory and litigation environment are all positives for the company.

Management’s goal is to generate total shareholder returns in the 14% range (including dividends) for Altria and 16% range for Philip Morris International going forward. Those types of growth rates make it worthwhile for investors to consider allocating small portions of their portfolios to both these companies. Altria (MO) should be a good long-term defensive bet while Philip Morris International (PM) offers growth at a reasonable valuation.

Last Updated: 4/2008.