Philip Morris, a burning issue


Among blue chips, Philip Morris has been one of the best performers during the recent rally, with a gain of more than 40 percent since mid-January. Despite its sharp rise, it continues to win kudos from a host of Wall Street analysts, who insist that it remains undervalued, based on its strong underlying growth (25 percent per year expected over the next few years), impressive cash flow, and its wide range of brands, not just cigarettebrands, but also Kraft, General Foods and Miller Brewing.

"Ultimately the stock price has to catch up with the underlying earnings," says veteran beverage-industry analyst Manny Goldman of PaineWebber in San Francisco. The earnings have been growing so quickly that this has been difficult. Philip Morris currently sells at about 14 times estimated 1991 earnings. Goldman forecasts $4.80 a share, and for the following year he expects earnings of $5.90 a share, which means that the stock is now at 11 times those earnings. All of which does makes the stock seem cheap, when you consider that the P/E (price/earnings ratio) of the Standard & Poor's 500 index is about 17.

Furthermore, Goldman says, another food giant, PepsiCo, sells at a multiple of 20 times this year's estimated earnings, and 16 times next year's. And Philip Morris is every bit as much of a growth company as Pepsi, although Pepsi doesn't have to worry about legal and regulatory problems surrounding tobacco. Goldman says that either Pepsi is too expensive, or Philip Morris is too cheap. He believes the latter. On the basis of 20 times earnings, Philip Morris should be selling in the 90s, especially when you consider the future restructurings that should further diminish the impact of tobacco. It currently sells in the mid-60s.

The risk, Goldman says, is if the company gets blindsided by tobacco litigation. "But at this point," he says, "that doesn't look too likely."

RECESSION WATCH: Every six months or so I like to check in with Robert Laurent, an economist at the Chicago Fed, for an update on his esoteric recession-predictor. Here's how it works: If the Treasury-bond rate is 200 basis points (2 percentage points) more than the federal funds rate (the rate banks charge each other for overnight loans), GNP growth will continue. That's because falling fed fund rates tend to spur credit. But if the spread is below 50 basis points or, worse yet, if the fed funds rate is ahead of the T-bond rate (as in 1980-81), a recession is likely.

With the T-bond rate now at about 8 1/4 percent, and the fed funds rate at 6 1/4 , the spread can be considered bullish, confirming what many economists have been saying -- that the )) recession will soon be over. Laurent's indicator tends to lead the actual event by six months. With the exception of the past two quarters, when a favorable indicator failed to anticipate a temporary credit crunch, Laurent's predictor generally has been excellent.

SHORT POSITIONS: Hours before the first Scud landed on Israel in January, I spoke by phone with Israeli money-manager Ehud Shiloni at his home in Tel Aviv about Israeli stocks. His message at that time was that, when you buy the stock of an Israeli company, "you cannot assume that it will be peace and quiet for the duration of your holding." The other day Shiloni sent me the following: "Just to fill you in on the market sentiment here, Scud or no Scud, the Israeli market composite index was 231.23 on Jan. 16. It was 262.02 on Feb. 12, for an increase of 13.7 percent. Just goes to show you something about valuations and sentiments."

In Japan, corporate managers have the upper hand over shareholders. The Washington-based Japan Economic Institute notes that most Japanese firms hold their annual shareholder meetings on the same day and at the same time. And they have an informal competition to see which can run the shortest meeting. The average for the 1,600 companies that met on the same day last year was less than 30 minutes.

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