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Stock Analyst Update

Philip Morris Looks Attractive

Litigation threats recede, and profits keep coming.

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What Happened?
Tobacco and food giant Philip Morris (MO) reported fourth-quarter earnings of $0.87 per share Wednesday, a penny short of First Call consensus estimates but 13% higher than the same period last year. The company attributed the slight shortfall to a combination of unfavorable currency translation and interest expense from its acquisition of Nabisco. The tobacco and food divisions showed solid earnings gains, but profits for Miller Brewing fell 31% from last year.

What It Means for Investors
Purely on an operational basis, Philip Morris continues to be a profit machine, and with the threat of tobacco legislation lessening, its stock is looking more attractive as well. The Kraft division has been especially productive, with a 19% operating margin and double-digit sales growth in the fourth quarter. That strong performance is especially encouraging because Philip Morris is planning to spin off part of Kraft this year, and it will be able to get a higher price if the division is doing well.

The specter of bankrupting tobacco litigation has haunted Philip Morris for the past few years, but the clouds have lifted somewhat in recent months. The $145 billion verdict against the tobacco companies in last July's Engle case has had little effect so far and may be overturned, and the Bush administration is widely perceived as less hostile to tobacco companies than the Clinton administration was. Even though Philip Morris' stock has risen 80% in the past six months, it's still quite cheap, with a Zacks forward P/E less than half that of the S&P 500. For investors who don't mind the ethical questions involved in owning tobacco stocks, Philip Morris is a solid choice, in our opinion.

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David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.