Philip Morris Battling Reduced Expectations

| About: Philip Morris (PM)

It's been a couple of weeks now since Philip Morris (NYSE:PM) reported its second quarter results, which were pretty dismal. The cigarette giant was hurt by low shipment volumes and currency issues, missing on both the top and bottom line. The stock has been mostly range bound over the past few weeks, as you have two competing forces. On one hand, this company is an investor favorite thanks to its large buyback and upcoming dividend raise. But on the other hand, growth expectations have been reduced due to poor quarterly results. Today, I'll examine where things stand for Philip Morris against some other names in the industry.

Current expectations:

When comparing Philip Morris to others in the space, I look at three other names: Lorillard (NYSE:LO), Altria (NYSE:MO), and Reynolds American (NYSE:RAI). 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. These are the analyst estimates for 2013 and 2014, as well as a two-year total. I've also provided each company's dividend yield as another way to compare these names. The yellow highlight indicates the leader in that specific category.

There is one thing that clearly stands out here. Lorillard now leads in all seven categories. I'm pretty sure that this is the first time that there has been only one leader in all of the categories. When I last updated this table, three of the four names had some sort of lead. Philip Morris led in both the revenue and earnings growth categories for 2014, while Reynolds led in dividend yield.

Philip Morris's growth expectations have come down after its poor second quarter report. Analysts now expect just 0.2% revenue growth this year, compared to 2.6% growth at my last update. The 2014 revenue growth figure has been cut from 5.4% to 5.1% as well, bringing the two-year total down from 8.1% to 5.3%. In terms of earnings per share growth, a similar pattern exists, with the two-year total down from 19.3% to 16.5%. Philip Morris stated that their overall business outlook remained the same, and that the earnings per share hit was all due to currency issues. While that may make investors feel a little better, stagnant net income and reduced cash flow are worrisome for now. I examined the impact of those two items in more depth in my above-linked quarterly earnings wrap-up.

Current Valuations:

You could have the greatest company on earth, with great growth, dividends, buybacks, etc., but that doesn't mean it will be the best investment. Sometimes, it all comes down to valuations. If that "greatest company" is just too expensive, it might not be worth it. As those who follow me know, Philip Morris's valuation is one item I've tracked extensively in the past. The following table shows valuation metrics for each company in this article, as of my last update and now.

You can see that Philip Morris's valuation rose since my last update. Part of that is the stock's rally of more than $2, but also it is due to the reduced expectations. Anyone that has read my continuous coverage of Philip Morris knows that PM shares trade at a premium. Investors have been willing to pay for the solid amount of growth and the sizable buyback. I've continued to track that premium, on both a price-to-sales and price-to-earnings basis, with the results found below (compared to my last update).

The premium has increased a bit, which is a little worrisome given how the growth prospects have declined. However, the premium we are at now is nowhere close to the highest point I've seen in the past couple of years, so that's a good sign.

Analysts say buy Philip Morris:

I always like to look at what the professional Wall Street analysts think when it comes to the names in this space. The following table shows the average analyst 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 Tuesday's close.

Philip Morris remains the analyst favorite. Since my last update, Philip Morris's and Altria's ratings have increased by 0.1, and Lorillard's is up by 0.2. A higher number is not good, because that means analysts are moving from buy ratings to neutral ratings. As was the case in my last update (and many of my updates), Philip Morris has the greatest upside to the average analyst target.

Final Thoughts:

Philip Morris shares have been very stagnant in recent weeks. While this name is an investor favorite, reduced expectations have some on the fence. We are a little over a month away from their next dividend announcement, which is expected to be a dividend raise. That will be the next catalyst for the stock, which hopefully will get Philip Morris shares moving again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.