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About a month ago, I recommended that investors take advantage of the recent fall in shares of cigarette giant Philip Morris (NYSE:PM). The stock had dropped about $12 off its 52-week high and was trading for $82.39. For those that entered around those levels, they have made a nice short-term profit. However, the recent rise in shares has pushed the name up to the higher end of its recent range. The valuation is becoming a bit stretched at this point, and the stock is probably due for one of its $4 pullbacks I've referenced several times. Philip Morris is getting expensive again, and for those looking to enter or accumulate here, you may want to wait.

Current Expectations

When comparing Philip Morris, I've looked at four other names, which I'll stick with, for consistency. They are Lorillard (NYSE:LO), Altria (NYSE:MO), Reynolds American (NYSE:RAI), and British American Tobacco (NYSEMKT:BTI). The following table is one I've used in several articles for this industry. It shows the currently expected growth, in terms of both earnings per share and revenues, for 2012 and 2013, along with a two-year total. The yellow highlight shows the highest number amongst those names for the period and figure shown.

Those are where expectations stand as of Wednesday. But a current number is meaningless unless you know where the number was previous. So here are the changes in each name's forecast since my last article in mid-November:

  • Philip Morris: 2013 revenue growth forecast increased from 6.2% to 6.3%. Two-year total increased from 7.4% to 7.6%. 2012 earnings per share growth forecast increased from 6.8% to 7.0%. 2013 forecast reduced from 11.5% to 11.3%.
  • Lorillard: 2012 revenue growth forecast reduced from 3.4% to 3.1%. 2013 revenue forecast reduced from 4.8% to 4.6%. Two year revenue total reduced from 8.3% to 7.9%. 2012 earnings per share forecast reduced from 6.5% to 6.3%. 2013 earnings forecast increased from 8.3% to 8.6%. Two-year total increased from 15.4% to 15.5%.
  • Altria: 2012 revenue forecast increased from 4.6% to 4.7%. 2013 forecast increased from 1.0% to 1.1%. Two-year total increased from 5.7% to 5.8%. 2013 earnings growth forecast increased from 7.2% to 7.7%. Two-year total increased from 15.6% to 16.1%.
  • Reynolds: 2013 revenue growth forecast increased from 1.1% to 1.2%. Two-year total improved from -1.6% to -1.5%. 2013 earnings growth forecast increased from 5.1% to 5.8%. Two-year total increased from 10.3% to 11.0%.
  • British American: 2012 revenue forecast decreased from 0.3% growth to no change. Two-year total decreased from 4.2% to 3.9%.

Philip Morris currently holds the best forecast in three of the six categories. In two of the three categories it doesn't lead in, the company places second. Of all five names here, Philip Morris has the best growth forecast.

The valuation is stretching a bit

I always say that growth is important, but the more important part is how much are you paying for that growth. Well, the following table shows valuation metrics for each, as of my last update and now.

These stocks have risen a bit since my last update, so the valuations have come up a bit. But remember, price is just one half of that. The growth forecast from above is the other half. As I've noted in past articles, Philip Morris trades at a premium to the other names in this space. The premium in the table below is Philip Morris' valuation in that category compared to the average of the other four, at the last update and now.

You'll notice in the two price to sales premiums, the premium is up by about 5% each since the last update. But the price to earnings premiums have risen by an even faster amount. The 2012 premium has stretched by 9.36% since the last update, and the 2013 premium is up 19.99%. Philip Morris is getting a bit more expensive on a forward P/E basis, and it really doesn't have to do with changes in the forecast.

Overall Analyst Opinion

Don't just take my word for it when it comes to Philip Morris. It's always good to see what the analysts say. The following table shows the average rating, where a 1.0 is a strong buy and a 3.0 is a hold. The table also shows the average, or mean, price target currently, and the upside to that target from Wednesday's close.

At my last update, only Philip Morris and British American had 2.3 ratings. Lorillard's rating has improved since then, with Altria's and Reynolds' staying the same. The upside for all of these names has come down since my last update with these names rising. Philip Morris had the second most upside last time, now it has the third, but these names are all close in terms of upside.

The fiscal cliff issue

Investors looking at Philip Morris want to know some possible impacts from the fiscal cliff. There are a couple of things to consider.

Let's say you bought this name over a year ago. You are probably up about $20 on your position, or even more. If you think that capital gains tax rates are going up, it might be wise to sell your position here and lock in the gain. Why do I say this? Well, let's say you are up $20. At a 15% tax rate, you have to pay $3 in taxes. If the rate goes up to 20%, you're now paying $4. If you can feasibly pay the taxes when due, why would you want to pay an extra dollar? By giving up that dollar, you are essentially losing 1.18 dividend payments, at the current rate, not counting dividend taxes for this argument. What if the rate goes to 25%, or more? It's something to consider for those that have the financial flexibility to do so. Again, this if you think tax rates are going up. Why pay more of your hard earned money to the government?

The other issue is rising taxes on the dividend. Currently, investors are paying a maximum of 15% on their dividends. However, if the tax rates go up, you could wind up paying a ton more. Based on Wednesday's close, Philip Morris is currently yielding approximately 3.83% on an annual basis. So I put together the following table to show how the after tax yield would be affected by an increase in tax rates. These are all hypothetical tax rates, but they prove the point.

An increase to 25% in the tax rate would cost you almost 40 basis points. A higher rate and the math gets worse. The key takeaway here is that high paying dividend stocks, like Philip Morris and the other cigarette names, could become less attractive investments if your after-tax yield is cut by a significant amount.

Final Thoughts

When it comes to Philip Morris, I've been fairly spot on over the last year or so. My buy recommendations have come mostly at the low points, and my sell, short, or don't buy ones have come near the tops. Why is that? Well, Philip Morris' stock has been very predictable. The stock hits a high, and then has a pullback of at least $4. This has happened a fair amount of times since it first broke $90 earlier this year. Below, I've provided a 6-month table to show you a series of these pullbacks. They are real and they are sharp.

What's the key takeaway here? Well, we've had a nice rally from a low of $82.10 on November 15th to the recent high of $90.84 on November 29th. If the recent high proves to be another top, a $4 pullback would bring us back under $87, or about 2% below where we are now. Philip Morris' valuation has come up a bit since my last update, and the premium has stretched a bit. Fiscal cliff worries are a serious consideration when it comes to this name. Right now, I'd stay on the sidelines if I didn't already have a position, and wait for this to come down before buying. I'm still a long-term bull on the name because of the dividend and buyback, but I'm not going to recommend buying a name that's a little overpriced. That wouldn't make any sense.

(click to enlarge)

(Source: Yahoo! Finance)

Source: Philip Morris Getting Expensive Again

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.