Altria to Spin Off Kraft… Shocking!

It’s amazing how many people have been quoted saying the Altria (MO) spin-off of its 89% ownership of Kraft Foods (KFT) will send the shares of MO to between $100 and $110 each. If we’ve known about the spin-off forever (we have, even though the exact date was just announced) why has the stock been trading in the mid 80’s? I guess I’m just not convinced that something like a spin-off, that surprised absolutely no one, will result in a 20% move in the shares of a company that, let’s face it, makes cigarettes.

Altria shares, ex-Kraft, trade at about 15 times 2007 earnings. Is this a bargain for the leading maker of so-called “cancer sticks?” Doesn’t seem to be. How much will investors be willing to pay for a company that sells a product that kills people and is hardly a rapidly growing market opportunity? Although the decline won’t be as rapid as many of us would like, I have to think that over the long term the number of people who smoke will go down, not up.

For this reason, shares of cigarette firms, including MO, traditionally have traded at a discount to the market. With shares of Altria trading at about a market multiple, it’s hard for me to understand why the actual spin-off of Kraft will cause a huge stock price spike. Such a move would require either 1) investors paying an above-average multiple for a business with a below-average growth rate, or 2) a dramatic increase in future earnings due to the financials flexibility that the spin-off provides.

The latter seems more likely than the former, but I still think Altria shares are fairly valued at current prices. In fact, it’s interesting to note that MO stock has actually dropped from above $87 to $85 since the company announced the details of the Kraft spin-off. The stock remains an excellent dividend play, but investors expecting an immediate move up to $100 or more might have to wait a little longer than some are predicting.

Full Disclosure: No position in MO