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How Foreign Taxes Help Phillip Morris International

There was a nice little piece this weekend in the WSJ about on of our favorite stocks/companies here at ValuePlays, Phillip Morris International (PM)

From the WSJ:

With most of the world in recession, expensive habits are fading fast. But international tobacco companies are still making smokers pay up for a hit.

While many consumer-products companies have capped prices, the likes of Philip Morris International and London-listed British American Tobacco are raising them. With cigarette sales likely in permanent decline in some markets, producers have focused on price.

Heard on the Street columnist John Jannarone explains to Simon Constable how premium cigarette manufacturer Philip Morris is actually getting a boost from foreign governments. Plus how industry consolidation is giving profits an extra lift.
That has helped some tobacco companies smoke market expectations. PMI’s shares have risen 8% since Thursday morning, when it said higher prices had boosted second-quarter profits. In the European Union prices rose about 5%, the fastest pace in over a year, according to Thilo Wrede of Credit Suisse.

And tax laws can actually work in favor of premium tobacco companies. Many countries tax cigarettes by the pack rather than as a proportion of the retail price.

That has caused low-end cigarette prices to rise more quickly than premium cigarettes. In France, for instance, premium cigarettes only cost 15% more than the cheapest option, according to Morgan Stanley’s David Adelman.

PM reported last week and raised full year guidance. Shares are up over 40% from the March lows and 8% last week as a result of earnings. They currently have a dividend yield of 4.5%.


Disclosure (“none” means no position):Long PM

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Developer Diversified Results Contradicts Retail Assumptions

Some very interesting items were discussed recently on the Developers Diversified (DDR) earnings call. As I read it I was struck how much of what was being said contradicts some of what is being assumed out there regarding the retail environment. Diversified is seeing strong leasing activity, rental rates that are not collapsing and assets they do not want (not prime) are selling for cap rates of 8.5% to 9%. One could assume from that prime properties would go for below 8.5%. These cap rates gel with what Macquarie CountryWide Trust (MCW.AU) recently sold assets for.

None of these numbers are nearly as dire as you would be lead to believe watching/reading media reports.

Here are some highlights:

Regarding leasing activity:

The short term macroeconomic headlines may suggest otherwise, but the current retail real estate environment presents a unique opportunity for retailers to aggressively seek external growth at significantly lower costs. Over the course of the second quarter, out leasing team held many key meetings with retailers to understand revolving platforms, and as a result we leased a historic amount of GLA.

Specifically, we signed 147 new leases during the quarter representing over 900,000 square feet of GLA at an average rental rate spread of negative 16.6. Additionally, there were 259 renewal deals executed during the quarter representing over 2.1 million square feet of GLA at an average spread of positive 1%. On a blended basis, there were 406 deals executed during the second quarter representing nearly 3.1 million square feet of GLA at an average spread of negative 4.72%. Compared to the previous quarter, we executed 58 more leases and leased 1.2 million more square feet of GLA.

I’d like to point out that of the 900,000 plus square feet of new deals signed during the second quarter, 45% represent space that was recently vacated by bankrupt retailers. The spread on new deals signed to backfill space formerly occupied by bankrupt retailers was negative 24.2%, which is consistent with our expectations and past guidance, while the average rental rate spread on new deals, excluding those signed to backfill bankrupt retailers, was negative 9.8%.

Despite the challenges of backfilling space formerly occupied by bankrupt retailers, we have seen solid improvement in the rental rates from the first quarter to the second quarter. In the second quarter, we leased 466,000 square feet of space that was previously occupied by bankrupt retailers versus the 233,000 square feet leased in the first quarter. And the average rent per square foot increased 63% for that space from the first quarter to the second quarter, resulting in an overall positive impact on our average base rent per square foot portfolio wide.

The most active retailers include Bed, Bath and Beyond and its various concepts, Best Buy, hhgregg, Hobby Lobby, JoAnn stores, Nordstrom Rack, Dollar Tree, AC Moore and regional grocers, such as Sprouts. Also very active are Staples, Michaels, and the TJX companies, the parent company for T.J. Maxx, Marshalls, A.J. Wright and HomeGoods. We have multiple executed leases or inactive lease or LOI negotiations with each of the retailers that I just mentioned.

I would also like to highlight the fact that two of our largest tenants, Wal-Mart and TJX, recently announced significant long-term debt refinancing transactions. The low cost of capital of many of our largest tenants is likely to encourage and fund their future growth.

From the Developers Diversified Q & A:

Jay Haberman – Goldman Sachs

And just switching gears for a moment, could you walk through I guess the bid as spreads on asset sales. I mean it seems, as cap rates seem to be moving above 9%, are you seeing a lot more interest on the part of buyers?

Scott Wolstein- Chairman and Chief Executive Officer

There’s been a little bit of an increase in cap rates in terms of our pipeline. Most of it’s been related to the quality of assets that we’re selling. Obviously, the lower the quality, the higher the cap rate and we’ve been highly focused on selling the assets that we don’t want to own.

But the assets have reasonably good quality that may not make the cut for our prime portfolio that are under contract and we’re negotiating. We’re still trading in the mid-eights to the low nine kind of cap rate range. So I think that there hasn’t been a really significant change.

And I also think, obviously, there is a big print on the trade for McCrory Countrywide to CalFirst and First Washington. I think it’s a little dangerous for people to extrapolate from a transaction of nearly $1 billion in size as to what it means for cap rates on individual asset sales.

In a transaction of that magnitude, as you can image, there’s very limited competition and it’s a much more difficult negotiation. On the one-off deals, it’s a very, very different landscape in terms of leverage. And you shouldn’t expect to see any significant difference in terms of future asset sales here on a cap rate basis from what we’ve been able to achieve earlier this year

Later:

Carol Kemple – Hilliard Lyons

Where do you all expect to see occupancy at December 31st?

Dan Hurwitz- President and Chief Operating Officer

We think that occupancy will go up, as I mentioned, nominally in the second quarter and again – I mean in the third quarter and again in the fourth quarter. So at the very high end, we think we can end the year at about 50 basis point plus in occupancy from where we are today, and on the low end somewhere in the 20 to 30 basis point movement.

Again, does this mean it is all system go? Of course not. But I think some of the more dire CRE predictions out there may prove to be well off base, especially if the TALF-CRE program actually get the traction many are now thinking it may and the host of CMBS REIT’s that are planned gain traction.

Now this does not mean there will not be significant CRE stress and probably more REIT’s that go under. But it also means that there will be survivors and simply avoiding the whole sector due to armageddon scenarios I think will cause many to miss some significant opportunity.


Disclosure (“none” means no position):None

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Monday's Links

Buffett, TALF, Gas, Happy Hour

– Worried about inflation……welcome aboard




– This market may just be starting to shake loose a bit

– Some predictions for Natural Gas

– Nice program. @Dasan as alway has some very interesting thing to say



Disclosure (“none” means no position):

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Monday’s Links

Buffett, TALF, Gas, Happy Hour

– Worried about inflation……welcome aboard




– This market may just be starting to shake loose a bit

– Some predictions for Natural Gas

– Nice program. @Dasan as alway has some very interesting thing to say



Disclosure (“none” means no position):

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"Cash for Clunkers" Calculator

Everyone has heard about the “cash for clinkers” program but not too many people know if it is a good deal. well, here is some help.

Make sure if you decide to do it to visit your local AutoNation (AN) dealership…


Disclosure (“none” means no position):Long AN

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Wall St. Media 7/23

Talking about Phillip Morris International (PM) and natural gas (UNG)


Disclosure (“none” means no position):Long PM, UNG

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Wall St. Media 7/23

Talking about Phillip Morris International (PM) and natural gas (UNG)


Disclosure (“none” means no position):Long PM, UNG

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More Evidence Dow Ag Will Not Be Sold

Dow Ag is not acting like a division of Dow Chemical (DOW) about to be sold……..good.

From the IBJ.com:

Dow AgroSciences has signed a 15-year lease that will spur construction of an 80,000-square-foot research-and-development building, to be erected adjacent to its headquarters in northwest Indianapolis. As a result, the company plans to hire dozens of additional researchers.

Dow AgroSciences’ new two-story building will be developed and owned by Indianapolis-based Browning Investments Inc., which also will be general contractor on the project. It will be in Browning’s Northwest Technology Campus.

Terms of the deal were not disclosed. The Indiana Economic Development Corp. offered Dow AgroSciences up to $2.4 million in performance-based tax credits and $120,000 in training grants based on the company’s hiring plans.

The local office of Los Angeles-based CB Richard Ellis served as leasing agent. The building was designed by Indianapolis-based BSA Lifestructures and will house laboratories for about 100 researchers—a combination of existing employees and new hires.

Groundbreaking will occur next month. Dow AgroSciences anticipates occupying the building by mid-2010.

The deal strengthens Dow AgroSciences’ local roots. Its parent, Midland, Mich.-based Dow Chemical Co., this year has been evaluating whether to divest the agricultural chemicals and biotech business. Dow Chemical is expected to announce its intentions for the business this summer.

Dow AgroSciences CEO Jerome Peribere declined to comment directly about whether a sale is off the table, saying it’s not his decision. But he went on to note that Dow Chemical’s financial position has improved since the first quarter, when the company was “fairly stressed.”

“Dow AgroSciences is clearly a strategic asset for the Dow Chemical Co. And the divesture of Dow AgroSciences would be, as [Dow Chemical CEO] Andrew Liveris has said several times, counter-strategic,” Peribere said.

“Therefore, the fact that Dow Chemical has restructured its balance sheet and is continuing to proceed with nonstrategic divestures, I would only comment this is all very good news for Dow AgroSciences.”

“We love being here,” Peribere added.

Peribere noted that Dow AgroSciences has been regularly expanding. Its headcount was less than 1,000 three years ago, he said, and now stands over 1,200.

This comes on the heals of a recent acquisition, and comments from the company that seemed to back off their original statements about it being on the block.

Perhaps this is some of the reason for the recent price run from $14 to $20 (up from $8 at its low), the confidence by the market this growth engine for Dow will remain not only part of it but a substantial contributor to earnings as we go forward.

Now of course until they actually come out ans say “Dow Ag is of the block”, anything is possible. But given recent statements and actions, one would have to think an outright sales at this point is remote.


Disclosure (“none” means no position):Long DOW

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Heckman Corp….

Was alerted by reader Enrico to the following article on Richard Heckman and the more I read, the more interested I got.

Some quick valuation numbers:
Assets= $456m (after $184m goodwill write-down on China Water assets)
Liab. = $13m
Debt = $0
Cash = $199m
M Cap = $350m

From the company’s website:

Heckmann Corporation (NYSE: HEK) is a holding company that was created to make investments in attractive businesses. The Company completed its first investment, the acquisition of China Water in October 2008, now operating as wholly-owned subsidiary, China Water & Drinks, Inc. On July 1, 2009, the Company completed its second investment, the purchase of a multi-modal water disposal, treatment, and pipeline transportation business in Texas, now operating as wholly-owned subsidiary, Heckmann Water Resources Corporation. The Company also makes strategic minority interest investments, such as its recent investment in Underground Solutions, Inc. (OTC: UGSI).

We have a strong balance sheet and seek additional acquisition opportunities as we build a worldwide enterprise. As of March 31, 2009, we had $300 million dollars in invested cash and cash equivalents. We intend to make additional investments and acquisitions as we find attractive long-term opportunities for our stockholders.

PE.com reported on the China Water deal:

Palm Desert entrepreneur Richard Heckmann is diving back into the water business, with an aim to consolidate the bottled water industry in Asia, much like he did in the United States to the tune of billions in revenue.

The former chief executive of Palm Desert-based US Filter said early Tuesday that his acquisition firm would acquire China Water and Drinks Inc. for about $625 million. Heckmann said China’s rampant groundwater pollution, coupled with its population of 1.3 billion people, provide for an ample market. About 250 companies produce and sell bottled water in China, a hefty number that Heckmann said he hopes to consolidate.

During the conference call, Heckmann said China Water ranks fifth in overall revenue among competitors in Asia, behind Coca-Cola China….

…Heckmann’s blank-check company raised $450 million in an initial public offering in November. At that time, Heckmann was coy about what companies he would be interested in buying.

“We like water, but we like everything,” he said last year.

I really like this. It is another buy for less than book value ($4.02) in a company with no debt and near 50% of the share price is cash on the books. The two businesses they have bought to this point are very good businesses. China Water is a leader in its field there (yes there was a problem with some folks there “skimming” but that has been address and their shares/warrants cancelled, hey, its China) and the Greer Exploration is a very interesting business that oil & gas companies cannot do without (a better explanation of it is in the release that follows).

CEO and Chairman Richard Heckman owns just under 12% of the outstanding shares. Goldman Sachs (GS) recently (last quarter) took a 4.7m share stake in the company.

This is a play a bit like Compass Diversified Holding (CODI). Growth will come from the businesses they buy and sell.

Here is a press release updating the current investments the corp. has made:
hek1

Agreement to buy Greer Exploration:
Heck 2

Here is the China Water Presentation:
hek


Disclosure (“none” means no position):None ….Yet

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Friday's Links

Heckman, CMBS, Kmart,

– Great article/interview. Hat tip reader “Enrico”.

– Another reason to close the rating agencies

– This is a great idea….make the products more accessible to people will equal more sales


Disclosure (“none” means no position):

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Friday’s Links

Heckman, CMBS, Kmart,

– Great article/interview. Hat tip reader “Enrico”.

– Another reason to close the rating agencies

– This is a great idea….make the products more accessible to people will equal more sales


Disclosure (“none” means no position):

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Phillip Morris International Beats,Raises, Buys Back ….

This is a great quarter…..just great…

Highlights:

  • Reported diluted earnings per share of $0.79 versus $0.80 in 2008, including the items detailed on Schedules 4 and 13
  • Excluding currency, reported diluted earnings per share up 22.5%
  • Adjusted diluted earnings per share of $0.83 versus $0.87 in 2008, including the items detailed on Schedule 12
  • Excluding currency, adjusted diluted earnings per share up 17.2%
  • Increases its forecast for 2009 full-year reported diluted earnings per share to a range of $3.10 to $3.20, from $2.85 to $3.00, which includes the Colombian Investment and Cooperation Agreement charge of $0.04 per share. Excluding currency, diluted earnings per share are projected to increase by approximately 10%-13%
  • Declared a regular quarterly dividend of $0.54 during the quarter
  • Spent a total of $1.4 billion to repurchase 34.7 million shares of its common stock in the quarter
  • Announced agreements to purchase the South African affiliate of Swedish Match for ZAR 1.75 billion (approximately $222 million) and the Colombian cigarette manufacturer, Productora Tabacalera de Colombia, Protabaco Ltda. for $452 million

NEW YORK, July 23, 2009 – Philip Morris International Inc. (NYSE / Euronext Paris: PM) today announced diluted earnings per share of $0.79 in the second quarter of 2009, down 1.3% from $0.80 in the second quarter of 2008, including the items detailed on the attached Schedules 4 and 13. Excluding currency, reported diluted earnings per share were up 22.5%. Adjusted diluted earnings per share were $0.83, down 4.6% from 2008 adjusted earnings per share of $0.87, including the items detailed on the attached Schedule 12.

“Adverse currency again weighed on our results, but our underlying performance continued to be robust despite the challenging economic environment,” said Louis Camilleri, Chairman and Chief Executive Officer.
“Indeed, on a currency neutral basis, net revenues, operating companies income and adjusted diluted earnings per share were up 8.8%, 14.9% and 17.2%, respectively. While our volume performance principally reflected consumption declines in numerous markets, share performance was strong driven by our focus on innovation. Of particular note was the improvement in our financial performance in the EU Region versus the recent past.”
2009 Full-Year Forecast
PMI increases its forecast for 2009 full-year reported diluted earnings per share to a range of $3.10 to $3.20, from $2.85 to $3.00, which includes, at current exchange rates, an unfavorable currency impact of $0.55 per share compared to $0.80 per share in the February 2009 forecast. Excluding currency, diluted earnings per share are projected to increase by approximately 10%-13%. This guidance includes a pre-tax charge of $135 million ($93 million after-tax), equivalent to $0.04 per share, relating to the Colombian Investment and Cooperation Agreement announced during the quarter, and excludes the impact of any potential future acquisitions, asset impairment and exit cost charges, and any unusual events.

Dividends and Share Repurchase Program

PMI declared a regular quarterly dividend of $0.54 during the second quarter of 2009, which represents an annualized rate of $2.16 per common share.

During the second quarter, PMI spent $1.4 billion to repurchase 34.7 million shares of its common stock. Since May 2008, when PMI began its previously-announced $13 billion, two-year share repurchase program, the company has spent a total of $8.1 billion to repurchase 178.1 million shares.

Acquisitions and Agreements

On July 2, 2009, PMI announced it had entered into an agreement to acquire Swedish Match South Africa (Proprietary) Limited (SMSA) for ZAR 1.75 billion (approximately $222 million). The transaction is subject to South African regulatory approval and is expected to be completed by the end of the year. It is anticipated that the acquisition will be immediately marginally accretive to PMI’s earnings per share.

On July 10, 2009, PMI announced an agreement to purchase the Colombian cigarette manufacturer, Productora Tabacalera de Colombia, Protabaco Ltda. (Protabaco) for $452 million. The transaction is subject to competition authority approval and final confirmatory due diligence and is expected to close within six months of the announcement. The acquisition is projected to be immediately marginally accretive to PMI’s earnings per share.

As we have said here before I am using PM as a dollar devaluation play also for reasons stated here. This is a pretty simple investment. We all know the economics of tobacco are unbelievable. We also know that PM has a first class management team. So the only thing really getting in the way of continued long term gains are governments trying to get a piece of the pie. Other than that, it should be pretty clear sailing…

PM Q2 2009


Disclosure (“none” means no position):Lomg PM

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Graham and Doddsville Summer 2009

This was a particularly interesting issue for me as I find myself going down the market cap scale finding opportunity. Well worth the read…

Graham and Doddsville


Disclosure (“none” means no position):

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Northwestern to General Growth: "Willing to Enter Negotiations"

The news just keeps getting better and better….

Here is the applicable wording:

The two Northwestern Debtors are essentially single asset real estate entities. The formulation of a plan for these two cases should not be complicated or overly time consuming. Presumably the Debtors will desire to extend the maturities of existing loans and/or work out a consensual rate of interest with respect to the loans following their current maturity. As long as the parties negotiate in good faith and do not “drag their feet” this process should take no longer than 45 to 60 days, assuming the parties can come to an agreement. While Northwestern is not committing to any agreement with the Northwestern Debtors, Northwestern stands ready and willing to enter into negotiations in order to move the process along.

Here is the full filing:
Northwestern GGP

For more explanation, please refer to this previous post from this morning.


Disclosure (“none” means no position):Long GGWPQ

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Holder of $1.5B in General Growth Debt: "In All Cases Mortgages Will Be Renogotiated"

They clearly cannot speak for other lenders but there is a clear trend emerging here….

Here is the very interesting disclosure:

The 2008 Facility Borrowers are, in the aggregate, cash flow positive by a significant amount after debt service and operating expenses (including agreed management fees payable to other Debtors and affiliates). On information and belief, the same is true of most of the SPE Debtors. In all of these cases, the mortgage loan will be renegotiated and the remaining creditors will be paid in full.

Full filing:
SPE GGP

Now this is far from a victory lap. A lender “willing to negotiate” a simple one year extension at a hefty interest rate really does not do anything for the cause. A minimum of three years is needed and five would be preferable. BUT, it is good to see that for the most part, heals are not being dug in and lender recognize owning the properties is not in their best interest AND there is no market to liquidate them. That only leave maturity renogotiation.

See posts on other lender willing to extend maturities….here and here


Disclosure (“none” means no position):Long GGWPQ