Deep Value in Altria
Monday October 9, 3:57 pm ET
By Billy Fisher
On Sept. 25, U.S. District Judge Jack Weinstein granted class-action status to a lawsuit against Marlboro maker Philip Morris USA and other cigarette manufacturers. In doing so, he presented Fools with a tremendous buying opportunity in Altria (NYSE: MO - News), the parent company of Phillip Morris. The market's knee-jerk reaction to the decision sent the stock tumbling 6%. At the time of this writing, it trades at $77 per share, versus $82 per share prior to the decision.
The class-action case is based on allegations that cigarette makers misled smokers into purchasing light cigarettes over the past three decades by implying that they were safer than regular cigarettes. While the potential damages to the tobacco industry as a result of this lawsuit could amount to $200 billion, I am not overly concerned.
In a famous study, legendary University of Pennsylvania professor Jeremy Siegel concluded that from 1957 to 2003, Altria delivered a 19.75% average annual return, assuming all dividends were reinvested in the company's shares. This performance was tops among all the S&P 500 stocks and beat the index by almost 9% per year. These returns were achieved despite the millions of dollars spent every year by the company in constantly fending off similar litigation. As recently as 1999, the company was incurring legal fees at the rate of $1 million per day.