Like its fellow cigarette makers, defensive play

Philip Morris

(MO) - Get Report

has been smoking in a burned-out market.

Now, even amid doubts about the strength of an economic recovery, analysts say the stock can still blaze. "We continue to believe that Philip Morris could have short-term appeal, as long as the market remains defensive," said Marc Cohen, a research analyst at Goldman Sachs. "But significant price-to-earnings multiple expansion could be limited for fundamental and legal reasons."

This year, tobacco stocks have been one of a few groups to outperform the broader market. The American Stock Exchange Tobacco Index is up 11%, while the

S&P 500 Index

is down 8%. On news that Philip Morris is

selling its Miller Brewing beer unit to

South African Breweries

, the stock was up 67 cents, or 1.2%, at $56.68, just below a 52-week high.

"Consumer stocks in general and tobacco stocks in particular have benefited recently, as investors have prized their consistent growth outlooks, even if those outlooks are not very strong," Cohen said.

As long as the market stays choppy, investors are expected to continue to reward stability. In 2002, cigarette maker

Loews

(LTR)

is ahead 3%, while

R.J. Reynolds

(RJR)

has advanced 25%.

"Eventually, investors will take a more constructive view toward a profits recovery," Cohen said. "At that point, they will put less of a price on the defensive characteristics these companies provide."

Tastes Great

With the government focused on terrorism, litigation against tobacco companies has been moved to the back burner. But lawsuits and public health concerns hang over Philip Morris and the rest of the industry. The accepted view is that the class-action personal injury suits, as well as the third-party cases brought by the Department of Justice, won't be brought to closure until 2004, Cohen said.

In the meantime, for people with a shorter time horizon, Philip Morris may be a wise investment, some analysts believe.

"Based on historical trading averages, its relative price-to-earnings multiple and dividend yield, there is room for Philip Morris to grow," said Robert Campagnino, an analyst at Prudential Securities.

Philip Morris has a 52% relative price-to-earnings multiple to the S&P 500, below its average 70% relative multiple. The company currently has a P/E of 11.6, while the S&P has a multiple of around 22. Philip Morris has been a steady 11% earnings-per-share grower, and now has a 4% dividend yield, compared with a 9% yield in 2000.

"I think you can make the case for a 60% to 65% relative multiple to the S&P," said Campagnino, who also believes Philip Morris will benefit from a "favorably structured transaction with Miller."

South African Breweries is paying about $3.6 billion in stock for Miller Brewing and assuming $2 billion of debt, which for Philip Morris should free up about $1.7 billion for its stock buyback program.

Philip Morris will get 430 million shares of the new company, SABMiller, giving it a 36% stake. Together, the Miller sale and the sped-up share repurchase program are expected to be neutral to 2002 and 2003 earnings, Philip Morris said. The company reiterated its projection of 9% to 11% earnings per share growth in 2002.