At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Wake up and smell the tobacco
September was a rough month for tobacco investors, as Stifel Nicolaus took a final puff, then stubbed out its "buy" ratings on Altria (NYSE: MO) and Lorillard (NYSE: LO). But this week, as the aroma of fresh earnings news wafts from Philip Morris International (NYSE: PM), one analyst at least is ready to take up the habit once again -- Credit Suisse, which just started Philip Morris shares at "outperform" ahead of Thursday's earnings. Why does Credit Suisse find the sin stock so intoxicating?
Good question. Problem is, not a single major news outlet has published details on the analyst's upgrade (although enough of them have confirmed it happened that we can at least be sure of that much.) So really, your guess is as good as mine on this one. ... But fortunately, I've got a pretty good idea what it is CS likes about PM: the price.
An addictive investment
Granted, selling for nearly 16 times earnings, international-operator Philip Morris costs a lot more than its domestic U.S. peers, with the exception of Reynolds American (NYSE: RAI). However, Philip Morris generates such copious free cash flows from its business as to make the stock attractive regardless:
- Priced at just 13.4 times FCF.
- Growing at a brisk, 11% annual clip for the next five years.
- Paying a sturdy 4.4% dividend.
While shares aren't quite as intoxicating a value as they were when I suggested buying them last month, they're still a relative bargain.
Profits so good, it's almost sinful
Now, I readily acknowledge that some investors turn up their nose at tobacco stocks. And if you have moral qualms about investing in Philip Morris, then don't. On the other hand, many of the same folks who diss the company as immoral are quite ready and willing to profit from other companies that market to our weaker natures. According to scientific studies, the foodstuffs sold by food and beverage companies such as McDonald's (NYSE: MCD), PepsiCo (NYSE: PEP), and Coca-Cola (NYSE: KO) are very addictive, and bad for our health (if not our wealth.)
Me, I'm a laissez-faire kind of an investor. As such, I'm more interested in knowing whether an investment will pay off, and less in the surgeon general's opinion of it. And in this regard, I have to say that Credit Suisse's record of investing in "sin stocks" is nothing short of commendable. Historically, its tobacco picks have outperformed the market.
More recently, its active recommendations of junk-food purveyors McDonald's and PepsiCo are both up strongly, alongside strong results elsewhere among restaurants and beverages companies. And while Credit Suisse's Coke picked hasn't yet popped, it's more than made up the difference with bottler Coca-Cola Enterprises:
|
Companies |
CS Says |
CAPS Says |
CS's Picks Beating |
|---|---|---|---|
| Coca-Cola Enterprises | Outperform | *** | 76 points |
| McDonald's | Outperform | **** | 19 points |
| PepsiCo | Outperform | ***** | 14 points |
| Coca-Cola | Outperform | **** | (15 points) |
Between Credit Suisse's record of investing in sin stocks, and my own disinterested examination of Philip Morris' financials, I have to say: I love the smell of tobacco this morning.
