Philip Morris Reaches A Critical Junction

| About: Philip Morris (PM)

It's been a couple of weeks now since cigarette giant Philip Morris (NYSE:PM) gave a weaker than expected forecast for 2014. The company stated that 2014 would be an investment year, and so earnings per share would be a bit lower than the company's longer-term growth plan. That news has sent Philip Morris shares lower, giving long-term investors a chance to enter the name at a decent price and a higher dividend yield point. Now that expectations have certainly come down, Philip Morris is at a critical junction. Today, I'll explain what's up with Philip Morris and where the giant stands in this industry.

Reaching a critical point:

Why do I say Philip Morris is at a critical point? Well, I believe we are at the point, or nearly almost there, where expectations and reality have met. Philip Morris shares have come down a bit, but so have expectations. At $85 and change, investors don't expect as much as they would at $90 and above. When a company that gives a weak forecast gets to a point where expectations and reality meet, it usually can be a good place to pick up some shares.

Expectations have come down, but there also is no guarantee that they won't come down further. Since Philip Morris issued that light forecast, analysts have reduced their 2014 average revenue number from $32.34 billion to $31.38 billion. Those numbers represent growth of 3.5% and 0.4%, respectively, over the 2013 estimate at that time. Remember, until we get the actual 2013 number, the 2014 growth percentage will depend on the changing 2013 estimate. Back in late November, analysts were looking for $5.89 in earnings per share in 2014 after $5.39 this year. Current estimates now call for $5.60 next year after $5.41 in 2013. So while 2013 estimates have come up by 2 cents, 2014 estimates are down by about 30 cents. What does this all mean? Well, in the next few sections, I'll show how this changes the Philip Morris growth story against some other industry heavyweights.

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.

I discussed above how Philip Morris' estimates have changed since the weak 2014 guidance was given, so I won't recap the changes. Remember though that I did do an update on these numbers shortly after the company issued 2014 guidance. So the changes I mentioned above are from a few days before the table I included in my latest update. For Philip Morris, expectations have come down. That is important, and the numbers above show what analysts think now.

There have been some changes in the expectations for the other names as well, so let me briefly discuss those. Lorillard has seen its 2014 average earnings per share estimate increased by a penny to $3.57. Lorillard has also seen its 2014 average revenue estimate come up from $5.48 billion to $5.49 billion. These increases are slight, but they continue to separate Lorillard from the pack. If you are looking for growth in this space, Lorillard is the way to go. This growth will come at a price though, as Lorillard's valuation has risen a bit with the stock in the past few months. That has sent Lorillard's dividend yield down a bit, and it currently is the lowest of these four names. Lorillard's next dividend declaration should be a raise, which will most likely push the yield back above Philip Morris. Depending on the raise, Lorillard's new yield could challenge Reynolds for second place.

Also since my last update, Altria has seen its 2014 average earnings per share number hiked by a penny to $2.58. Reynolds has seen its 2013 average revenue estimate reduced to $8.26 billion from $8.27 billion. Altria and Reynolds currently have the two highest dividend yields, and I don't see that fact changing in the next few months.

I've been covering Philip Morris for more than two years now, and it pains me to say that the company has the least amount of expected revenue and earnings growth in 2014. Philip Morris for the longest time was either in 1st or 2nd place, depending on the year and category. Well, it was a disappointing 2013 for the company, and 2014 isn't shaping up to be too much better. However, with expectations a bit lower, it does allow the company to beat, something investors hope will be the case. Now, the key question is valuation, and I'll cover that next.

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' 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.

The valuation of Philip Morris has changed, but the changes are different based on the fiscal year. With 2013 estimates coming up and the stock coming down, the 2013 P/E has dipped a bit. However, with 2014 earnings per share numbers coming down, the 2014 P/E has risen a little bit.

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 (previously expected) 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 2014 premiums have jumped, which isn't too surprising given that expectations have come down a bit for Philip Morris since my last update. Interestingly enough, Philip Morris now trades at a very small discount to its peers on 2013 earnings per share. A year ago, this premium was more than 10%.

Overall analyst opinions:

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 Friday's close.

Philip Morris remains the highest rated name among wall street analysts, despite the fact that it has the lowest growth profile. Philip Morris also has the most upside to its price target, something that has occurred in most of my updates.

Final thoughts:

Philip Morris has reached a critical point. Growth expectations for 2014 have completely evaporated, and the stock has come down a bit as well. At this point, Philip Morris shares are in-line or close to in-line with expectations, which makes it look like an attractive investment again. I pitched this name as a good buy at a 4.50% yield recently, and Philip Morris is getting close to this point again. At current prices, Philip Morris looks reasonable, much better than when this name was at $90 plus.

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.

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