Board Member Sergio Marchionne bought 1,000 shares of Philip Morris International Inc. (NYSE:PM) on November 1st at an average price of $88.27 per share, according to a filing with the SEC. Marchionne has bought shares in the company, which markets the Philip Morris brands of tobacco products to international markets following its split from what is now Altria Group, Inc. (NYSE:MO), fairly consistently over the last few years; he now owns about 43,000 shares directly. The stock price has generally risen over this period- for example, it is up 24% in the last year, and 49% in the last two years- so it’s possible that he is not making habitual purchases but simply continues to believe that the stock is overvalued. Research Marchionne’s insider purchasing activity and learn more about studies on insider trading, including why insider purchases tend to be bullish signs.
Philip Morris disappointed the market with its results for the third quarter of the year, reporting earnings that were down 6% from the third quarter of 2011. The decline was even lower in terms of earnings per share, as the company is quite aggressive in buying back stock ($4.6 billion in cash was used on repurchases in the first nine months of the year, in addition to the $4.0 billion that was paid out in dividends). On a geographic basis, operating income was down in the European Union region (which is Philip Morris’s largest region in terms of sales, though lower margins have made Asia the largest contributor to operating income) and either up or about flat elsewhere. Overall, revenue was down 5%.
At 17 times trailing earnings and 15 times forward earnings estimates, we wouldn’t call Philip Morris International a pure value stock. It needs to grow its earnings- beyond what analysts are expecting for next year- in order to be fairly valued at the current price. Its 3.8% dividend yield does make it attractive, and the company should be able to partially offset any further decline in business with share repurchases, but those aren’t sustainable sources of value creation.
Adage Capital Management increased its stake in Philip Morris International by 40% during the second quarter of 2012 to a total of 4.1 million shares. Adage is managed by Phil Gross and Robert Atchinson, who had previously managed capital at Harvard Management (see more of Adage’s stock picks).
Other cigarette companies include not only Altria but also British American Tobacco plc (NYSE:BTI), Reynolds American, Inc. (NYSE:RAI), and Lorillard Inc. (NYSE:LO). All four of these peers have forward P/E multiples between 12 and 14, which places them at discounts to Philip Morris. However, on a trailing basis Philip Morris is about in the middle of the pack: Lorillard trades at only 14 times trailing earnings but the other three are clustered between 16x and 19x. Therefore, these other companies- possibly because they are not as exposed to the European market- are expected to grow their earnings more rapidly over the next year. That’s possible, and perhaps even likely, but serves as a grain of salt for Philip Morris’s apparent premium. As might be expected, these cigarette companies all pay high dividend yields- generally around 5% or higher, though British American Tobacco’s is actually a bit lower than what Philip Morris pays. Altria’s earnings dropped 44% in its most recent quarter versus a year ago, while Lorillard’s were down more slightly and the other two companies experienced slight increases.
If this recent insider purchase is interpreted as a bullish bet on cigarettes, then we think that Lorillard at least has more attractive pricing than Philip Morris does. If it is instead taken as an indication that the European market may begin strengthening, then perhaps Philip Morris could be worth further analysis. Of course, it’s also possible that this is just the latest in a series of routine purchases, so investors would be advised to check out either thesis before committing capital.