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View Full Version : How About Shorting Altria Symbol MO?


adios
04-01-2003, 11:51 PM
Altria is the new name for Phillip Morris. Apparently there's a 12 billion dollar judgement against them in Illonois. From my reading of the situation Altria may be forced to post a $12 billion dollar bond while the verdict is being appealed. There's a problem with that scenario, Altria doesn't have $12 billion. In fact tangible BV is NEGATIVE. Moody's today downgraded Altria's corporate debt 2 notches. They're not going to get a big loan from anyone. Debt to equity ratio is 1.2 to 1 so it's not horrid but leveraged none the less. Altria is trying to get some special legislation in Illonios to put up less than the $12 billion. Anti-smoking groups want to keep Altria's feet to the fire to try and force a lucrative settlement for the plaintives. Altria could be forced into bankruptcy and I have no idea how equity holders would fair in a chapter 11 re-org but usually they don't fair well. This anit-smoking case was in regards to false advertising of low tar cigarettes. One bummer about shorting Altria is they have a high yield now so you'd have to pony up the dividend when it came due. I haven't tried to short it yet myself so I don't know if shares are available to short or not. Probably so. I'm not going short tomorrow as I'm going to crunch some numbers. I also want to understand the settlements they've made along the line.

Wildbill
04-02-2003, 01:05 AM
Hmm, sounds fishy to me. First off isn't there an insurance piece to this that would cover some of their eventual payoff? Second like you say its crazy to demand judgement like this when there are so few companies who could pay it. They would run to bankruptcy court down the hall from the court they lost in.

While activist groups and of course the frickin lawyers love to make these kinds of cases, you are right the actual people who deserve the money may see very little of it. Since they have mostly to pay off the attorneys a settlement gets made.

Lastly, don't be so sure they can't borrow at least some of the money. What they will do is just pass on the charge to smokers. They could borrow it or put out a debt issue that is securitized by a $X per pack surcharge to be paid out over a number of years. If only the lawyers didn't get so much of the money I would say its a great idea, after all its a tax on cigs in a time when lawmakers are abdicating their role as tax collector and trying to raise taxes as little as possible. Over time most of the money wouldn't even be paid by consumers here, but in foreign countries where smoking is growing or maintaining its revenues in the face of falling US demand. Not to mention wouldn't it be hilarious if we got the smoking health costs paid to our states and the bill was footed by the French and German smokers who seem to have never seen an enclosed public place they didn't think went better with wafting smoke, haha. That would be such a bitter irony...

MtSmalls
04-02-2003, 06:54 PM
There are a lot of interesting things going on with this case, not the least of which is the fact that half of the states in the country are now TIED to the tobacco industry and are in painful need of the settlement payments agreed upon a few years ago. Now Phillip Morris is saying (this is a political/legal tactic nothing more) that they may have to declare bankruptcy in order to post the bond in Illinois. This has several of the states now BACKING PM in order to save their needed payments.

Phillip Morris (and several other big tobacco companies) may have a negative tangible book value, but they have HUGE cash flows, and they can usually pass the costs along to the consumers, though this is finally getting tougher. Shorting here would be a very bad idea.

adios
04-02-2003, 10:47 PM
If it's a very bad idea then a long would be right no? I appreciate your input and wildbill's. We'll see how this one develops.

I read an article in the WSJ talking about the states relying on MO cash flows. I have no idea what their loan covenants are like if they go into chapter 11. Looking over their financial statements they pay a lot of money in dividends and stock buybacks. I calculated it to be about $10 billion for the previous 4 quarters. As wildbill stated they probably can get financing and they can suspend the divy and the stock buyback. I see these cases as ongoing though even though they've settled some. The lawyers will come up with new ways bring about action and the juries are sure to be sympathetic to those suing MO.

MtSmalls
04-04-2003, 04:09 PM
Tom,

I am not sure that the logic follows through that Altria (or RJR or UST) is a good buy, simply because its a bad short. There are a TON of unknowns here, making it a tough call either way. The stock has been very volatile in the past few weeks, up 7% at one point yesterday, finishing flat, then down 2-3% again today. The best way to play this might be some sort of straddle using options (buy both puts and calls at different strikes). IMO the best way to play this is to stay away....

adios
04-04-2003, 09:24 PM
Staying away is probably a good idea. Thanks again.

strategem
04-05-2003, 01:17 AM
Tom


MO isn't a perfect short right now from a TA perspective - it is reaching a strong support area at app. 28.50. It is likely to bounce up from here - notice that it had a strong upward reaction off this level. That said, the stock is in a clear downtrend and is a potentially a very good short candidate - look for a breach of the 28.50 level, perhaps to i.e. 25, then a move back up to 28.50 on low volume - this would be a great time to short the stock with stops above 29. IMHO only, please implement appropriate risk management rules on every trade.