For the most part, earnings season has come and gone. In the cigarette industry, the big names have all reported. It's been a month since I reported on them, so it is time to update all the numbers. Today, I'll focus on these names, with my usual added emphasis on the giant in this space, Philip Morris (PM). For Philip Morris, it's time to get back to basics. With 2013 almost over, it is time for the cigarette giant to put this mediocre year in the rear view mirror and look towards a better 2014. The question for investors is if now is the time to pull the trigger, or if a better opportunity will come. Let's take a look.
When comparing Philip Morris to others in the space, I look at three other names: Lorillard (LO), Altria (MO), and Reynolds American (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.
As I mentioned above, 2013 has not been the year that many expected for Philip Morris. When Philip Morris reported 2012 Q4 results earlier this year, analysts were calling for revenue growth in 2013 of more than 5%, to more than $33.1 billion. Current estimates call for almost $2 billion less than that. Those estimates now actually show a decent chance of Philip Morris showing the worst revenue number of these four names this year, a decline. On the earnings per share front, Philip Morris is expected to show the least amount of growth. Philip Morris also has the lowest dividend yield, but that has been the case for a number of years. Surprisingly, Lorillard's dividend yield has come down a lot lately, but that's due to a sharp rise in the stock. I'll cover that in a little more depth later on.
But as 2013 is coming to an end, it's time to start looking towards 2014. In terms of revenues, Philip Morris is in 2nd place in terms of expectations. However, it is a distant second place to Lorillard. In terms of earnings per share, Philip Morris is again in second, although the spread for earnings per share is not as large amongst these four names. Lorillard has the best 2014 growth profile, followed by Philip Morris, Altria, and Reynolds American.
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 against the rest of these names 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 will notice that these valuations have all risen since my last update. That's a major function of stock price. Since my prior update, here's how these stocks have fared (ignoring any dividends).
- Philip Morris up 3.66%.
- Lorillard up 14.76%.
- Altria up 8.68%.
- Reynolds up 5.23%.
Lorillard has rallied strongly thanks to e-cigarette sales, but upcoming regulations could stop this rally in its tracks. Once the FDA makes its announcement, it will be very interesting to see not only if Lorillard's stock holds up, but how analyst estimates change as well. If a Lorillard negative ruling comes out, Philip Morris's growth profile could become a lot more attractive entering 2014.
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).
With Philip Morris shares being up the least since my last update, it is logical that the premium came down. The huge rally in Lorillard shares has also helped take down the premium. This premium is one of the lowest I've seen it, and a few of those categories may actually be at new lows. Remember, when I first started tracking these numbers, the price to sales premiums averaged 35% and the earnings premiums averaged about 18%.
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 Monday's close.
Since my last update a month ago, the only ratings change is an improvement in Altria from 2.3 to 2.2. Philip Morris remains the strongest buy according to analysts. However, that has been the case for a while now and the stock has not been the best performer. Philip Morris again has the most upside to the average price target.
2013 has been a disappointing year for Philip Morris. The company's growth story did not play out as planned, so now it's time to start looking towards 2014. Philip Morris no longer trades at a huge premium to the space, which represents the reduced growth profile. Philip Morris remains a great value stock, but obviously would be a lot better buy at $85 than at $90.
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.