Sergio Marchionne, who is a member of Philip Morris International Inc. (NYSE:PM)’s Board of Directors, purchased 1,000 shares of the company’s stock on July 23rd at an average price of $89.07, according to a filing with the SEC. Marchionne now owns almost 50,000 shares of the $150 billion market cap cigarette company, which focuses on international markets; Altria Group (NYSE:MO) was formed in the split of the old Philip Morris International Inc. (NYSE:PM) to focus more on sales in the U.S.
While Philip Morris International Inc. (NYSE:PM)’s headline revenue numbers increased slightly in the second quarter of 2013 versus a year earlier, this was eaten up entirely by higher excise tax numbers and as a result the company’s gross profits and net income both declined over the same period. A roughly similar story holds if we look at its year to date income statement; considering that international markets are supposed to be an area of higher growth for the cigarette industry, this is concerning. At its current market cap Philip Morris International Inc. (NYSE:PM) trades at 17 times trailing earnings, and in value terms we’d generally look for at least moderate earnings growth at that price.
We maintain a database of quarterly 13F filings from hundreds of hedge funds. We’ve found that the information in 13Fs can be useful in developing investment strategies (for example, we have discovered that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and we can also track interest in individual stocks among this fund universe over time. Renaissance Technologies, founded by billionaire Jim Simons, owned 4.1 million shares of Philip Morris at the end of March (find Renaissance’s favorite stocks). Billionaire David Shaw’s D.E. Shaw reported a position of a little less than 2 million shares (see D.E. Shaw’s stock picks).
Other cigarette companies include Altria, British American Tobacco PLC (ADR) (NYSE:BTI), Lorillard Inc. (NYSE:LO), and Reynolds American, Inc. (NYSE:RAI). British American Tobacco PLC (ADR) (NYSE:BTI) is the closest to Philip Morris in terms of its annual dividend yield, at about 4%, while the other three companies mentioned here post yields about a percentage point higher than that figure. Lorillard Inc. (NYSE:LO) is the only one of these peers to be achieving revenue growth, and that company actually experienced quite high earnings growth rates as well. We wouldn’t count on high growth at the company in the future, but it actually trades at a discount to the rest of this peer group at a trailing P/E of 14 and would therefore seem to be the best target for future research. Earnings growth was above 10% compared to a year ago at Reynolds American, Inc. (NYSE:RAI) and Altria as well, though those two companies saw small declines in sales and so we’d be concerned about the sustainability of their profits over the long term. With trailing P/Es in the high teens we would avoid those names.
It does look to us that Lorillard is a more interesting stock in the industry from either a value or income perspective than Philip Morris International is. Even with the insider purchase, the stock features a low yield compared to its peers and at least going by its recent results the company’s performance is not strong enough to justify paying a 17x multiple on trailing earnings, and so we don’t recommend following Marchionne here.
Disclosure: I own no shares of any stocks mentioned in this article.
