WSJ: Phillip Morris International Shares “Worth Picking Up” $$

• Posted by ToddSullivan
• on January 31st, 2010

Makes a nice case that either Phillip Morris (PM) is under prices OR Altria (MO) is over priced.

We talked about PM on last weeks show..

From WSJ:

Tobacco is a tropical plant that has adapted to withstand harsher climates. After years of bumper harvests, it is easy to forget how vulnerable it can be.

Cigarette makers have started to get used to an easier environment recently, as lawsuits have all but disappeared. In 2008, not a single ruling was made against the industry by a U.S. court. Shares of tobacco giants Altria Group and Lorillard have risen about 35% since the start of last year, without the cloud of litigation hanging over them.

But a number of verdicts in so-called Engle cases are again raising the specter of costly lawsuits. Engle cases are a threat to big tobacco because they let plaintiffs use a previous court finding that smoking causes cancer and that companies made false statements about their products.

In coming months, many more Engle cases will likely go to trial, along with possible suits related to cigarettes labeled “light.” Morgan Stanley’s David Adelman says damages could potentially total hundreds of millions of dollars in the next two to three years.

Yet share prices don’t appear to reflect such danger. Consider Philip Morris International, which sells tobacco exclusively outside the U.S. and faces no domestic legal risk. Its shares trade at 12.2 times 2010 consensus earnings. But the premium it enjoys over the U.S. tobacco companies has narrowed over the past year, with Altria trading at 10.7 times 2010 earnings and Lorillard at 12.1 times.

Mr. Adelman says tobacco companies have never paid material health-related damages or settlements outside the U.S. And while smoking is declining in some places overseas, Americans are quitting cigarettes at an even faster rate.

For such a modest premium over its riskier U.S. peers, Philip Morris International is worth picking up.

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