Philip Morris' (NYSE:PM) shares have underperformed this year, lagging shares of domestic peers Altria (NYSE:MO) and Lorillard (UNKNOWN:LO.DL) by approximately 13% and 27%, respectively. After this poor performance, many investors are wondering if the company's performance will pick up during 2014, or if it is time to jump ship.
Traditionally, as the only international tobacco company with its primary listing within the US, Philip Morris has been the tobacco company of choice for investors looking for international growth. Additionally, Philip Morris owns the world-famous Marlboro brand, one of the most valuable consumer goods brands in the world. As a result, investors have been prepared to pay a premium for Philip Morris' shares over those of its domestic peers.
Unfortunately, it appears that for the time being Philip Morris' investors are going to have to wait for the company to return to its sector-leading position. In particular, Philip Morris' management recently stated at the Morgan Stanley consumer goods conference that next year would be a year of slow growth and consolidation for the company. Specifically, management is going to increase its spending in growth markets and spend cash to develop products which it believes can drive the best growth. These products include 'reduced risk' products, such as electronic cigarette devices, in an attempt to move the company away from its dependence upon traditional cigarettes.
Off the back of this guidance, Philip Morris' management predicts that earnings per share will only expand around 6%-8% in 2014. Management will issue precise EPS growth guidance for 2014 in February next year.
Nevertheless, after a year of growth and consolidation, Philip Morris is targeting long-term currency-neutral EPS growth of 10%-12% annually during 2015 and beyond.
This lower growth forecast does lead me to believe that Philip Morris' stock price won't recover during 2014 as higher spending and sliding volumes of cigarettes sold continue to weigh on the company's growth.
Time to go elsewhere?
Traditionally, investors have looked to Philip Morris for international exposure, which has enabled the company to grow faster than its domestic peers. However, it now seems as if the global tobacco market is slowing while the domestic market is still growing. For example, Altria, owner of Philip Morris USA, is forecast to expand EPS by 7%-9% in 2013 on an adjusted basis. This includes the effect of a one-time pre-tax charge of $0.35 per share relating to the company's cash tender offer for a portion of its own debt.
With this being the case, it might be time for domestic investors to start looking closer to home for the results they desire from tobacco companies.
In addition, Altria's domestic peer Lorillard grew its EPS 18% for the first nine months of this year, beating all of its domestic peers. Lorillard achieved this growth in two ways. Firstly, the company's operating income expanded 14% for the period. Secondly, the company's highly effective stock buyback reduced its number of shares in issue by 4% for the period. So a combination of sales growth and well-timed repurchases drove Lorillard's EPS higher.
Actually, Lorillard's share buybacks have been some of the most effective in the tobacco industry and they have provided a significant boost to the company's earnings growth since it became independent. If we dig into the numbers we can see that from the end of 2009 to the end of the fiscal third quarter this year, Lorillard repurchased 122 million shares. To put it another way, this is 25% of Lorillard's issued share capital based on its 2009 numbers.
These numbers imply that Lorillard's EPS have been boosted by around 5% every year by the company's buybacks alone. Over the same period, Philip Morris has only repurchased 17% of its outstanding shares--a significant amount, but not as much as Lorillard.
With Philip Morris failing to meet its long-term growth targets and a year of investment ahead, it is unlikely that the company's share price will recover for some time yet. On the other hand, domestic tobacco companies such as Altria and Lorillard are achieving rapid growth and Lorillard's cash returns to shareholders have been highly impressive. All in all, perhaps its time to look closer to home for growth in the tobacco sector.
Fool contributor Rupert Hargreaves owns shares of Altria Group. The Motley Fool owns shares of Philip Morris International. 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.