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TSC Ratings' Updates: ImClone

Altria (MO) received an upgrade to hold from sell. The Richmond, Va.-based firm is a major manufacturer of cigarettes and other tobacco products. Our recommendation is based on the company's strong revenue growth and interest coverage ability, partially countered by its narrowing margins and lower earnings.

Altria's fiscal second-quarter revenue increased 5.5% year-over-year to $4.18 billion, driven by the solid performance of its subsidiaries, Philip Morris USA and John Middleton. Segment-wise, tobacco products revenue rose 5.5% to $3.91 billion, whereas the financial service segment's revenue slipped 28.8% to $37 million. Additionally, its cigar business generated revenue of $85 million during the quarter.

During the quarter, Altria's gross profit and operating margin contracted 89 basis points to 48.1% and 138 basis points to 32.6%, respectively, adversely affected by a 7.3% rise in the cost of sales and 3.2% higher costs related to marketing, administrative and research. Consequently, earnings plunged 58% to $930 million, due to the spinoff of Philip Morris International (PM).

Altria's cash and cash equivalents balance dropped 93.3% to $415 million at the end of the second quarter. The debt-to-equity ratio was higher at 0.53 compared to 0.51 in the year-ago quarter, led by 74.9% lower debt and a 75.7% decline in shareholder's equity. On the positive side, returns on assets and equity expanded to 39.4% and 161.8% from 21.8% and 37.3% a year ago, respectively. Furthermore, the interest coverage ratio improved to 75.6 from 22.8 a year ago, helped by a 69.5% reduction in interest expenses.

Altria expects adjusted earnings from continuing operations for full-year 2008 to be in the range of $1.63 to $1.67 a share, reflecting a growth rate of 8.7% to 11.3% over the previous year. Additionally, the company anticipates annual savings of $250 million beginning in 2009, on the back of corporate restructuring initiatives undertaken during the recent period.

Altria had been rated a sell since April 30.

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