Smoking Out Philip Morris

 | Jun 06, 2013 | 4:00 PM EDT  | Comments
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A Form-4 filed with the SEC has disclosed that Fiat SpA CEO Sergio Marchionne, a board member at Philip Morris International (PM), purchased 1,000 shares of PM stock on May 28 at an average price of $95.08. Marchionne's previous purchase came in April, at prices a bit below $95. Insider purchases are often seen as bullish signals. Of course, investors cannot mimic every insider purchase, so we treat insider purchases like a stock screen, performing follow-up research on any stocks that seem interesting.

In this case, revenue at PM grew by 3% in the first quarter of 2013 vs. a year earlier, but much of this increase was eaten up by excise taxes and cost of goods sold. Pretax income was actually down slightly. The company reported $1.28 earnings per share for the quarter -- a slight increase from the first-quarter 2012 due to a lower share count. In theory, this means that the dividend payment of $0.85 (which makes for an annual yield of 3.7% at current prices) did not tax the business too much. Philip Morris's cash flow from operations fell to $1.4 billion during the quarter, primarily due to the company paying off some of its liabilities. By comparison, that's about how much cash was used on buybacks and dividends, respectively.

The stock currently trades at 17x trailing earnings, and with low earnings growth, we believe that investors are depending on EPS to improve slightly from further share repurchases or focusing on the income opportunity provided by dividend yield. Wall Street analysts forecast significant growth in earnings per share, including at a double-digit rate for 2014 over this year's numbers. That suggests PM is looking for net income to pick up as well, even though recent performance in that area has not been strong. We wouldn't put too much weight on the projections given the tendency towards sell-side optimism, but we suppose it does make any potential source of upside.

We'd compare Philip Morris to other cigarette companies such as sibling company Altria (MO), Lorillard (LO), and Reynolds American (RAI). Lorillard, the smallest of these three peers by market capitalization (though still a large-cap stock at a valuation of $16 billion) is priced at a small discount with a trailing price-earnings ratio of 14, while the other two companies feature trailing earnings multiples in line with Philip Morris, in the 17 to 18 range. These three stocks all offer considerably higher dividend yields than Philip Morris does, clustering in the range of 5%, and while Philip Morris in theory could be supposed to have better growth opportunities given its international focus, we've seen that recent results have not been that strong, at least on the bottom line. The beta statistics are also a bit lower than that of Philip Morris, showing that it is less tied to movements in broader market indices.

While Philip Morris certainly continues to be a reliable cash flow machine and steady source of dividend payments, investors should consider other cigarette companies at least at first, rather than following the insider purchase now. These three peers are more generous on the dividend front, while being at least as attractive on a pure value basis as well.

--With Matt Doiron

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