Friday, May 21, 2010

PM approaching "deep value"

This market down turn has brought opportunity back on the table. Granted that the market is still sliding and today's action may not be any signal that we are going to start going up again, but nonetheless it is time to see if we are approaching value in any corner of the market.

Phillip Morris International might be one such stock. Currently trading at 44.26$ this stock might be a good case study for this down turn and an experiment on the "Simplified DCF" that I had mentioned earlier. This is ofcourse looking beyond the morality of investing in a organization that sells cigarettes.

PM has a trailing EPS of 3.41$ and a forward EPS of 3.82$. The projected growth rate of the company is about 10% for the next five years and it yields a dividend of just above 5%.

If we use trailing EPS as our reference then 3.41 * 10.5 = 35.80. Plus an additional 2.32$ of dividend and that makes it 37.80$. The company is purchasing stock back at a rate of reducing the float by 12%, so if we factor a 12% increase in value that is an additional 4.53$ which brings us up to 42.336$.

If we take the forward EPS as our reference then, we first discount the projection by 10% which is 3.45$. So 3.45 * 10.5 = 36.225. Plus the dividend and the buyback adjustment and we have 43$. Now if we consider the Euro crisis as a hit of 5% to future earnings if the Euro continues to slide, then we have 40.85$.

So in summary the deep value for PM appears to be around 41-42$ and at 44.26 I am close to calling it fair and jumping in. Given the market negativity and assuming that the slide continues for some time I don't think it will be hard to pick up PM at 41$.

1 comment:

  1. Fabulous call at the time. Rode it from low 40s to 94$ before lightening up at 88$