Philip Morris International Inc. (PM, Financial), the largest publicly traded manufacturer and marketer of tobacco products, sells cigarettes all over the world.
Intangible assets
The company has an absorbing diversification, offsetting the declining consumption in developed countries. China and India are markets on which management should focus and are promising in the long run. Not just geographic reach should be on their radar but also the apparent increase of e-cigarettes consumption. Taking advantage of customer loyalty to the leading brand Marlboro, the company has a strong pricing power.
These two things make this company invaluable: Its tobacco products portfolio and the “new” e-cigarettes position the company to lead the industry. In a competitive market, brand recognition is a valuable intangible asset that should lead to growth and expand the market share.
Although governments are imposing restrictions to reduce smoking, the tobacco industry is a $40 billion revenue industry. Philip Morris has long-term drivers, and the strategic plans for the main growth regions will contribute to future profitability.
Moreover, it is paying good dividends to shareholders. The 3.75% dividend yield makes the company a perfect fit for any portfolio, knowing that higher dividend yields have historically outperformed stocks with lower dividend yields.
Relative valuation and price performance
Regarding valuation, the company sells at a trailing price-earnings (P/E) of 24.6x, trading at a premium compared to the industry mean, and it is close to the 10-year high of 24.79x.
| Ticker | Company | P/E |
| RAI | Reynolds American Inc. | 14.6 |
| MO | Altria Group Inc. | 10.4 |
| BTI | British American Tobacco plc | 20.6 |
This ratio indicates that the stock is relatively overvalued when compared to Reynolds American Inc. (RAI, Financial), Altria Group Inc. (MO, Financial) and British American Tobacco (BTI, Financial). This should not surprise investors as the stock hit an all-time high of $108.90 on the back of its fourth-quarter results. On a year-to-date basis, the stock has risen almost 19%, and in the same period, Altria Group and Reynolds American have raised half of it.
In the next graph, we can see the evolution of the stock price together with EPS. The reason is that earnings often lead the stock price movement. As we can appreciate, the price performance and EPS showed an interesting upward trend in the last five years.
The variation in the last month was due to strong results. Revenues have increased by 9% to $6.97 billion from $6.39 billion. The tobacco company reported a quarterly profit of $1.71 billion and earnings of $1.1 per share compared to $1.25 billion, or 80 cents per share in the same quarter of the previous year. Recently, the company management raised its 2017 EPS guidance to $4.80 to $4.95 from $4.70 to $4.85.
Final comment
Loyalty among smokers, attractive brand portfolio and identity allow the company to have premium prices against its peers.
Hedge fund gurus were active in the company in the fourth quarter of 2016. Joel Greenblatt (Trades, Portfolio) opened a new position with 458,877 shares, while Jim Simons (Trades, Portfolio), T Rowe Price Equity Income Fund (Trades, Portfolio) and John Rogers (Trades, Portfolio) have taken long positions on it (5946.67%, +99.16% and +93.42%, respectively.
Disclosure: Author holds no position in any stocks mentioned.
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