Among the questions we have received post initiation one of the more consistent is “why no love for PM?” More specifically, “isn’t PM mispriced versus other large cap staples companies?”
Our response takes us back to one of our favorite quotes from an underappreciated character on “The Simpsons”, Reverend Lovejoy:
“Ooooh short answer yes with an if, long answer no with a but…”
So, short answer, yes PM is mispriced growth if we didn’t have concerns that 2013 consensus EPS estimates were too high. We would prefer to have a clearer path to EPS upside as the quarters of 2013 are reported and as it currently stands, we are $0.08 below consensus for 2013 ($5.73 versus $5.81). Our primary regions of concern heading into 2013 are Western Europe – admittedly not a new issue, but one that has displayed continued weakness with respect to both volume and profit and will likely remain a drag throughout 2013 despite some easy comparisons. Also, Eastern Europe (part of Eastern Europe, Middle East and Africa in PM’s reporting structure) is a “watch out” for us as we have seen signs of incremental weakness among a number of companies, most notably the beer companies.
Long answer, no PM isn’t mispriced growth, but there are a number of companies, mostly notably large cap HPC names such as KMB and CLX that we would happily pair against a long position in PM over a longer duration, recognizing that there may be some hiccups around the PM quarters if our math is correct. Top line growth is what garners a multiple in staples and where PM has delivered an average of 7.7% constant currency organic growth over the past eight quarters, KMB and CLX have been at 3.0% and 2.4%, respectively, on the same metric. Yet, KMB trades at 15.0x 2013 EPS and CLX at 16.6x – PM trades at 14.6x consensus and 14.8x our number. Even if EPS results for PM in 2013 more closely resemble the $5.59 number that KMB is currently expected to earn, the current stock prices are virtually identical and we feel very strongly that should not be the case. Even PEP at 15.9x next year with an average top line of 5.9% doesn’t compare well to an investment in PM given the current relative multiples. Also, to be clear, our view on the achievability of consensus estimates for either KMB or CLX is no more certain than our view on PM.
Dividend yield tells largely the same story, as CLX yields 3.46%, PM 4.00% and KMB 3.52%. It appears that the market has decided to put a lower multiple on higher growth as well as having the asset that is faster growing in the long-term have the higher yield. We aren’t quite there yet, but every once in awhile the market takes us back to Mugatu in “Zoolander” where he exclaims “I feel like I’m taking crazy pills!”
Bottom line, we can certainly abide by pair of PM against some other names that have garnered a multiple that we consider to be inappropriate versus those companies’s longer-term earnings growth profile, but we have concerns over how consensus has been modeled in 2013 for PM.
HEDGEYE RISK MANAGEMENT, LLC