Fast Tracking for Ideas

July 19, 2008

In the January/February 2006 issue of the Financial Analysts Journal, Jeremy Siegel and Jeremy Schwartz published a study titled Long-Term Returns on the Original S&P 500 Companies. Their conclusion would seem to support a buy and hold strategy: “We found that a portfolio of the original 500 stocks chosen by Standard & Poor’s in 1957 to launch their index outperformed the actual (updated) S&P 500 over the subsequent 46-year period and with lower risk.”

They provided a table of the 20 best performing survivor companies based on returns over the period from March 1957 to December 2003. The list was comprised of 11 consumer products companies, 6 pharmaceutical companies, 1 retailer, and 1 integrated oil company. The company completing the list and that caught my attention was Crane. Here’s a mid-cap industrial company vulnerable to economic cycles whose stock returned 15.1% over the period studied making it the 10th best performer.

Fast Track results: Crane (CR) failed 3 of the 10 categories, and is a potential idea that’s worth the time to thoroughly research.

Key points:

  1. “A diversified manufacturer of highly engineered industrial products,” Crane adds a lot of value to the products it sells. The Aerospace and Electronics division can boast that its products can be found on “virtually all commercial and military aircraft.”
  2. Crane’s long-term staying power through good and bad times, together with the returns that the stock has awarded shareholders is impressive.
  3. Crane has been growing cash on its balance sheet. The company ended this year’s first quarter with cash and equivalents of $294.7 million, up from $133.9 million a year earlier and $283.4 million at the end of 2007.
  4. Free cash flow has been growing. The company generated free cash flow of $185.7 million in 2007, up from $154.5 million in 2006. The first quarter came in at $35.0 million, which was $5.1 million above a year ago.
  5. Earnings beat Street expectations for the last 4 quarters, and consensus estimates for this year and next have held steady. Management stated their earnings forecast for 2008 in the annual report and re-affirmed it in the first quarter earnings release at $3.45 - $3.60, for a gain of 8% - 13%.
  6. Street analysts are giving little support to the stock, leaving plenty of room for ratings upgrades. Eight analysts are covering Crane, and only 2 are recommending purchase.
  7. Crane offers good value. The stock’s P/E based on trailing 12-months earnings per share is 11.3, well below the S&P 500’s 18. The PEG ratio at 1 also compares favorably with the S&P 500’s 1.2.

The Company Stock Risk Profile Fast Track is a research tool for quickly and easily screening stocks for potential ideas. Fast Track is comprised of 10 key categories incorporating fundamentals, valuation and how management and the Street feel about the stock. I like to see a stock fail no more than 3 categories before putting the stock through the complete 50-category Company Stock Risk Profile research process. Most important, whatever screening tool you choose to use, always thoroughly research the stocks that pass your screen before buying.

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Posted by sjshaw

Why I Own Altria

July 9, 2008

“PM USA estimates that total cigarette industry volume declined approximately 4% in the first quarter. For the full-year 2008, PM USA estimates a total cigarette industry volume decline of approximately 3%.” Altria Group’s tobacco manufacturing and distribution business, PM USA expects this trend to continue with industry shipment volume declining 2.5% - 3.0% annually over the next few years. So, why would anyone own Altria Group (MO)? I do, and here’s why:

Altria dominates the U.S. tobacco industry with powerful brand names. The company has a commanding 50.9% share of the cigarette retail market. Marlboro boasts a 41.5% share. Acquired last December, John Middleton placed Altria in a leading position in the machine-made large cigar market with a 26.8% share. Middleton’s key Black & Mild brand controls 25.9% of that market.

Altria has a fortress balance sheet with lots of cash and low debt. The company ended this year’s first quarter with $4.8 billion in cash and cash equivalents, and long-term debt as a percentage of total capital of 13.5%.

Altria has always been and still is a cash machine. Right out of the box post spin-off the company delivered free cash flow of $1.9 billion in the first quarter.

Management is implementing a strategy that should support earnings growth in a shrinking market. The strategy calls for: cutting expenses at rates that exceed declines in cigarette volume; growing market share; and extending product lines and leveraging distribution through acquisitions and internally developed products.

Here’s how the company is performing so far:

  1. Management plans to slice $1 billion out of the company’s cost structure by 2011. Selling, general and administrative expenses will drop by $600 million. Corporate headquarters functions have been restructured, including the relocation to Richmond, Virginia from New York, and should yield annual savings of $250 million starting next year. Another $156 million will come from the closing of the Cabarrus, North Carolina manufacturing facility and subsequent consolidation with the Richmond, Virginia facility by 2010.
  2. Market share grew in the first quarter from a year ago. The company’s share of the cigarette retail market gained 0.5% on the back of Marlboro’s 0.7% increase.
  3. John Middleton is in a segment of the industry that’s growing 4% - 5% per year. Middleton posted a first quarter volume gain of 8.2% with Black & Mild increasing its market share by 3 points.
  4. New products have not worked out so well. Marlboro Ultra Smooth, a high tech filter cigarette, was recently pulled from the marketplace due to low acceptance. Other failures include a cigarette with a battery-powered holder to heat the tobacco, and a spit free chewing tobacco. I believe that shareholders would be better served if management would abandon this part of their strategy and redeploy these resources on what they know and already are doing best.
  5. Altria has started 2008 with a solid earnings performance. Earnings per share (adjusted for one-time items and from continuing operations) came in at $0.37 in the first quarter, up 12.1% from the same year earlier period on a 2.8% gain in net revenues. Management affirmed their forecast for 2008 earnings per share at $1.63 - $1.67, for an increase of 9% - 11% off of a 2007 base of $1.50, and set an objective of growing earnings 8% - 10% over the next few years. Projections by Street analysts are at the high end of these ranges.

Altria has a 28.6% ownership interest in SABMiller, the world’s largest brewer. At the end of the first quarter, Altria’s investment in SABMiller was carried on the books at $4.1 billion and had a recent market value of nearly $10 billion.

The company is returning cash to shareholders. The Board of Directors set the initial quarterly dividend at $0.29 per share, and is targeting a 75% payout ratio. They also approved a $7.5 billion share repurchase program to be completed over 2 years. The company began buying back shares in April.

Altria’s shares are attractively valued with a price / earnings ratio and yield that compare favorably with the S & P 500. The shares’ price / earnings ratio, at 12.9x 2008 earnings per share of $1.63, is below the S & P 500’s 14.5x based on S & P’s earnings estimate of $88.04 for this year. The shares also offer a fat 5.5% yield, well above the S & P 500’s 2.4%.

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Posted by sjshaw