Is Philip Morris A Buy At Current Levels?

Although it has had a rather muted start to the year, could Philip Morris deliver a strong performance through 2014?

May 27, 2014 at 10:45AM

 Philip Morris (NYSE:PM) has delivered a slightly disappointing performance thus far in 2014, with the manufacturer of Marlboro cigarettes down around 1%. This doesn't compare favorably to the S&P 500, which is up over 2% year-to-date. However, Philip Morris was further behind the wider index and has bounced back from lows of $75.39 in early February to reach the current price of $86.34, which is roughly in the middle of its 52-week range of $75.28-$95.60. With this in mind, is now the right time to buy shares in Philip Morris?

Drilling down into the first quarter results from Philip Morris
The most recent quarterly update (first quarter, released on April 17) was roughly in-line with expectations and contained few surprises, with the company delivering resilient and encouraging numbers. Negative currency impact, however, continues to have a significant effect on earnings per share (EPS) figures. With it included, Philip Morris saw EPS fall by 7.8% when compared to the first quarter of 2013, while excluding it equated to a rise of 4.7% versus the same time period in 2013. This shows that a glance at EPS figures can be misleading, with the impact of currency clouding the real performance of the company during the period.

Furthermore, excluding currency impact from forecasts means adjusted EPS is set to be between 6% and 8% higher in 2014 than it was in 2013 (when it was $5.40). This is highly encouraging and shows that Philip Morris is, I believe, pursuing the right strategy through which to combat volume declines that are affecting the global tobacco industry. For instance, it is on course to achieve a productivity and cost savings target of $300 million this year, while the vast share buyback program continues apace – Philip Morris expects to spend $4 billion this year on the purchase of its own shares.

While both of these actions will do little to stimulate the top-line, they are a prudent response to the decline in cigarette volumes that continues to affect Philip Morris and its peers. For example, the company reported cigarette shipment volumes of 196 billion units for the quarter, which is down 4.4% versus the first quarter of 2013. Therefore, cost saving is a sensible response to this problem, while a share buyback is a useful means of the company utilizing its strong cash flow when shares continue to offer good value (more on that later).

Let's take a look at the first quarter performance of two of Philip Morris' peers
The first quarter was also encouraging for peers Altria (NYSE:MO) and Reynolds American (NYSE:RAI). While Reynolds American reported flat adjusted EPS numbers for the quarter (versus the first quarter of 2013), it reaffirmed guidance for the full-year where it expects adjusted EPS to improve by between 3.5% and 8.2% versus 2013. This is an impressive target and is backed up by continued strength from its key brands – for example growth brands Camel and Pall Mall increased their strong performance and increased their combined share of the market by 0.7% versus the first quarter of 2013, so that it now stands at 19.4%. Such strength allowed Reynolds to increase dividends per share by 6.3%, which equates to a forward annual yield of 4.7% and compares favorably to Philip Morris' forward yield of 4.4%.

Meanwhile, Altria's first quarter results saw a reaffirmation of adjusted forecast EPS numbers for the full-year, with the company on target to deliver bottom-line growth of between 6% and 9% compared to 2013. This growth rate is within the company's sights as a result of it anticipating an improved performance during the second half of the year due to factors such as lower fourth quarter costs in the smokeable products segment (because of end of quota buyout payments), as well as a substantially lower tax rate in the fourth quarter (because of the effect of Altria's debt tender offer in 2013). Furthermore, Altria expects to retain a dividend payout ratio target of 80%, which is highly encouraging for income-seeking investors, and means that shares currently trade on a forward dividend yield of 4.7%.

Strong performance plus an attractive valuation equals a 'buy'
Having delivered encouraging updates for the first quarter of the year, it is clear that Altria, Reynolds American and Philip Morris are implementing prudent policies with which to counter volume pressures that are a feature of the global tobacco market. With regards to the original question of if Philip Morris is a buy at these levels, the first quarter update provides evidence of the company's strong performance and resilience during a challenging period for the sector.

In addition, shares in Philip Morris also appear to offer good value for money at current levels. Their forward price to earnings (P/E) ratio of 15.2 compares favorably to the S&P 500's forward P/E of 15.8, while a forward dividend yield of 4.4% is roughly twice that of the S&P 500. Although shares have not made a great start to 2014, they seem to have the potential, in my view, to deliver strong performance through the rest of the year and, as such, they appear to be a 'buy' at current levels.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Robert Stephens has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information