Philip Morris International Inc. (PM) manufactures and markets cigarettes outside the U.S. in 180 countries. The company is engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside of the U.S.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.
Strong Brand Portfolio
The company’s portfolio of international and local brands include Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris and Red & White. The company also owns a number of local cigarette brands, such as Sampoerna, Dji Sam Soe and U Mild in Indonesia, Fortune, Champion and Hope in the Philippines, Diana in Italy, Optima and Apollo-Soyuz in Russia, Morven Gold in Pakistan, Boston in Colombia, Belmont, Canadian Classics and Number 7 in Canada.
Marlboro has been on the rise for years and we expect this good performance in fiscal 2014 as well. The “Don't Be a Maybe, Be Marlboro” marketing campaign renewed Marlboro's market share momentum. The company's plan is to introduce new packaging, new blends and other line extensions. For example, it has introduced new packaging and varieties of Marlboro in its new Marlboro 2.0 line-up.
A key driver of the company is the strong market share and the economies of scale. Also, the company has combated unfavorable tax regulations with price increases, showing a good price-elasticity. Further, it has entered into a series of agreements with Altria. Philip Morris will market Altria´s MarkTen e-cigarettes internationally. Also, both companies will work together to improve existing products.
Strong International Presence
Philip Morris is a dominant player in the EU and also has strong presence in several markets such as Korea, Philippines, China, Latin America and Canada. Asian operations will continue to be an engine for the firm's future growth, region that contributed to more than a third of operating companies’ income. The company is seeing robust growth in Indonesia, China, Philippines and Korea. Additionally, emerging markets are considered key markets; countries like India, Bangladesh, and Vietnam are potentially growth markets. In China, although the cigarette market is like a monopoly, the company entered into a joint venture with China National Tobacco to cross-sell products.
The firm is currently Zacks Rank # 2 – Buy, and it also has a longer-term recommendation of “Neutral.” A Buy rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 19.04%, which we think is very attractive. There are no comps with a better Zacks Rank.
Relative Valuation, Earnings and ROE
In terms of valuation, the company sells at a trailing P/E of 12.8x, trading at a discount compared to the industry mean. Earnings per share (EPS) were flat in the most recent quarter compared to the same quarter one year prior. This year, Wall Street expects a contraction in earnings ($5.12 versus $5.26). This is a very important warning signal.
In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance and EPS showed an interesting upward trend in the last six years.
Although governments are imposing restrictions on tobacco companies to reduce smoking with the aim of decline cigarette consumption, I believe Philip Morris has several catalysts which we discussed above that make me feel bullish on the company.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the first quarter of 2014. The fund Manning & Napier Advisors, the only manager that has beaten S&P500 for ten consecutive years, has added it in that time frame.
Disclosure: Victor Selva holds no position in any stocks mentioned.