Good news: The banking crisis has shifted from panic to nagging unease. Overnight deposit runs suddenly seem so early March. Thanks to quick policy action, small banks are leaking vital cash to industry giants and money-market funds in a much more orderly way.
Meanwhile, peak debt-ceiling danger is still a ways off. We have to learn about April tax receipts to know whether lawmakers will risk blowing up investor portfolios for Twitter likes in mid-June, or hold out until late August.
That leaves a calm stretch between financial terrors that by my math could last as long as three weeks. Who’s up for putting risk capital to work?
Stocks are just the thing for that, and after last year’s 19.4% price drop for the
S&P 500
index, bargains should abound. But the index goes for a full-freight 18.4 times this year’s projected earnings, and earnings estimates have been sliding. Savita Subramanian, a stock strategist at BofA Securities, reckons that the index is priced for 7% average yearly returns over the next decade. Near term, she calls 5% returns on cash “a compelling alternative.”
But surely stockpickers can find individual good deals. I noticed that
Walmart
(ticker: WMT) and
Philip Morris International
(PM) both got analyst upgrades this past week. The full excitement hasn’t hit me yet, but sometimes these things take a while to build. Let’s run through each case.
Walmart will host an investor day that starts Tuesday. There are plenty of
Amazon
-y initiatives to talk about. Walmart+ has an estimated 10 million paying members signed up. Between it and Sam’s Club, Walmart generates more than $5 billion in yearly dues. There’s a high-margin advertising business called Walmart Connect, a data service for suppliers called Luminate, a delivery platform called GoLocal, more warehouse robots, and experiments with package-carrying drones.
What investors will want to hear apart from all of that is whether Walmart can still boost revenue by 4% a year, and operating profit a bit faster. They can turn cranky when the margin outlook disappoints. Last summer, when management said that grocery inflation was cutting into general merchandise demand, leading to markdowns, shares lost 7.6% in a day.
Evercore ISI analyst Greg Melich is optimistic now, upgrading shares this past Thursday to Outperform from In Line. In his view, management’s investments in productivity and “omnichannel”—industryspeak for making stores and e-commerce play nicely together—have positioned traffic and margins for upside over the next two years. During the fiscal year through January, earnings declined to $6.29 a share from $6.46, adjusted for restructuring charges, divestitures, an opioid lawsuit settlement, and more.
Wall Street predicts another drop this year, to $6.11, before a rebound to $6.78 next year. Melich is 14 cents above the first number and 22 cents above the second. “We might be early,” he writes of his upgrade. But “amidst a decelerating retail world, we like Walmart’s scale, balance sheet, and stability.”
The valuation of 24 times this year’s earnings forecast will not set frugal hearts aflutter. For the better part of the decade ended 2016, Walmart stock could be had for less than 15 times earnings—much less, at times. But Melich sees the business as worthy of a premium to the market today. His price target of $160 is just over 23 times his $7 earnings forecast, and suggests around 10% upside for shares. There’s also a 1.6% dividend.
Looking for something hotter? Try tobacco warmed to just below combustion temperature. J.P. Morgan analyst Jared Dinges upgraded Philip Morris International to Overweight from Neutral on Wednesday. His price target of $116 would work out to a 20% gain from recent levels. There’s also a 5.3% dividend yield.
The cigarette market is far from collapsing: Population growth is offsetting worldwide declines in smoking rates. So, is Philip Morris’ motto of “delivering a smoke-free future” just puffery? Maybe not. It already has vape products and its proprietary IQOS system, which heats but doesn’t burn rolled tobacco to deliver nicotine without smoke. A new model called Iluma is selling well overseas despite production kinks. And last year’s purchase of Swedish Match brings tobacco pouches held between the lips and gums. All of that could be enough to get to 40% smokeless revenue by this year.
Next will be growing IQOS in the U.S., which J.P. Morgan’s Dinges calls the “largest nicotine profit pool in the world.” Last year, Philip Morris bought U.S. rights to IQOS from
Altria Group
(MO), beginning in 2024. That could get it to half smokeless revenue by 2026, and eventually lead to splitting the business in two. And just like that, it’s a smokeless future—for the part of the business that doesn’t get spun off.
For the next few years, Dinges predicts 8% to 11% yearly increases in earnings per share. He calls Philip Morris a “unique best-in-class growth story.” At the very least, it compares well with an ugly peer group. Altria invested $13 billion in a vape business called Juul, whose growth turned out to have been fueled by kids—the mango and crème brûlée flavors were clues. The Food and Drug Administration banned Juul over technicalities in its marketing application, and Altria wrote down 95% of its investment. Newport maker
British American Tobacco
(BTI) is a leader in menthol cigarettes, which antismoking groups seem particularly eager to ban.
Shares of Philip Morris trade at 15 times this year’s projected earnings, about their average for the past five years. It’s not quite a value stock, at twice the multiple of Altria or British American. The group is called defensive, but Philip Morris is pushing a fairly radical product shift for a company named for a London tobacconist who started selling cigarettes in 1847. Management has been marketing the company as a social-conscience story—thanks, but I’m trying to quit. I guess that leaves growth (some) and income (a lot). Both stack up well against the broad stock market.
Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
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