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Looking at its 05 year operating performance, the revenue, the operating income as well as the net income keeps increasing at the very steady rate year on year. The gross margin has improved from 61% to 65%, the operating margin and net margin fluctuates around 38% - 41% and 25-28% respectively.
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Net Margin (%) | 28.08 | 29.56 | 26.43 | 26.8 | 25.33 | 26.68 |
| Asset Turnover | 0.87 | 0.84 | 0.78 | 0.79 | 0.74 | 0.78 |
| Financial Leverage | 2.24 | 1.83 | 2.08 | 4.4 | 6.04 | 10 |
| Return on Equity (%) | 54.53 | 50.02 | 40.62 | 60.17 | 95.97 | 157.43 |
For its profitability, Philip Morris posted the impressively increasing in the return on equity. That increase in ROE is mainly due to the increase in the financial leverage, whereas the net margin and asset turnover are not improving, or even posts the slight decrease.
Screening its balance sheet, the increase in financial leverage due to three main factors: the increase in short- term debt as well as long-term and the increase in treasury stock, which the company uses its fund to buy back its shares over years. The first two former items often makes value investors like us cautious, and the latter one is more likely to be welcome.
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Net income | 5620 | 6146 | 6026 | 6890 | 6552 | 7498 |
| Operating cash flow | 5158 | 6236 | 5589 | 7935 | 7884 | 9437 |
| Capital expenditure | -736 | -886 | -1072 | -1099 | -715 | -713 |
| Free cash flow | 4422 | 5350 | 4517 | 6836 | 7169 | 8724 |
PM keeps producing increasing free cash flow, and the operating cash flow growth is more than the net income PM generates over the last 05 years. With quite stable capital expenditure, the operating cash flow and free cash flow is quite in line with each other. The Free cash flow currently stands at US$8.7 billions, with the current market value of $127 billion; the P/FCF is at 14.6x.
The current free cash flow yields of 6% and the free cash flow is anticipated with high probability for growing seems quite reasonable, it is not cheap price for PM, however, with its long established brands as well as with very loyal customers, PM can be considered the reasonable stock to hold for long-term with reasonable gains over years. The risks are always on the regulations on smoking and the litigation that the company is currently facing.
This is the subjective viewpoint of the author, it is not the recommendation to buy, hold or sell any stock. The person who wishes to do so should conduct his/her own research, act on his/her own decision, and bear his /her own risks.
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Leverage has gone up but is very manageable. PM mgmt is smart in terms of FCF allocation. The company issued low rate debt as the after-tax rate was much lower than the non-tax deductible dividend yield on the shares they bought with the proceeds so it is a fantastic arbitrage.
I have owned Altria/PM for years and for the first time I actually think the company is finally close to fair value at the current $70. That being said, it is probably still a decent risk/reward at current prices.