For Philip Morris, Another Adversary: Stockholders

Just how bad are things for Philip Morris Cos.? To hear Robert Huberman tell it, not bad at all. Huberman is general manager of Starkman Distributors, which sells cigarettes to casinos, mom-and-pop stores, and markets in Atlantic City. There, Philip Morris' brands are hot. "It seems like everbody's trying to catch up with Marlboro," Huberman says.

Wall Street concurs. Salomon Brothers Inc. analyst Diana Temple figures Philip Morris' second-quarter earnings will be up 16% from a year ago. For the year, profits should rise 16% as well. At Philip Morris, she says, profitability is "coming back more quickly" than anyone expected.

So why is PM's stock still languishing in the low 50s, down from a high of 61 in February? And why are its biggest institutional investors so rankled? Even now, some shareholders promise that if the company can't get its stock up appreciably by yearend, it almost certainly will face a proxy vote to divide the food, beverage, and tobacco giant at next April's annual meeting. Counters William Murray, PM's new chairman: "We want to improve stockholder returns. That's very, very important to us. At this time, we have shelved plans to separate the food business."

In large part, investors and analysts blame the company's lagging stock on Michael A. Miles, who unexpectedly resigned as chairman and CEO on June 17. They concede that Miles won the marketing wars: His dramatic move to cut Marlboro's price on Apr. 2, 1993, ultimately lifted the brand's market share to 28%, from below 20%, and weakened low-priced brands. That's a big reason why its U.S. tobacco profits this year will jump 15%, to $3.2 billion, after a disastrous 1993.

But Miles lost the publicity wars. He kept a low profile with investors, analysts, and the press, even as PM was attacked with lawsuits, legislation, and regulatory proposals. "Management has not successfully argued its case," says Bruce W. Gregory, portfolio manager at Progressive Partners Inc.

Enter Murray and Geoffrey C. Bible, the longtime tobacco men named to replace Miles as chairman and CEO, respectively. The two scored points with investors by barnstorming across the country the week of their appointment, promising to fight PM's enemies. Analysts were encouraged--by plans for an ad campaign, by saber-rattling comments about how much income tax the company pays, even by Bible's waving a cigarette. At least this CEO uses the product.

SPIN-OFF IDEAS. But the public jawboning will only go so far. Philip Morris executives have agreed to meet with major shareholders on July 13 to discuss their reasons for abandoning a previously discussed proposal to split the company into separate tobacco and food companies--the course Miles and many investors had favored.

The session could run aground on what one insider called "Henry Kissinger-like issues" such as who will participate, the format, and where it will be held. Still, the company's willingness to meet was seen as a step forward. "We are certainly open to entertaining other ideas and strategies, but they have to be shown to us, communicated to us, and that has not been done yet," says Anne Hansen, deputy director of the Council of Institutional Investors.

Beyond that, investors say Murray and Bible must make good soon--say, by August's board meeting--on their promise to boost shareholder value. Shareholders and analysts are looking for an aggressive stock buyback of $2 billion to $3 billion annually for four to five years. And a big dividend boost "would send a signal to litigants," says one PM watcher.

Changes at the company's food operation also seem likely. Analysts and former executives widely expect a spin-off or sale of its $4 billion food-service unit; though results have improved, analysts say its operating margins are still anemic, at about 3%. Wal-Mart Stores Inc. could be a buyer, but neither company will comment. Kraft General Foods Inc.'s $1 billion food-ingredients business is another candidate for spin-off. Will that be enough? To see if it works, watch the stock price.

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