A falling dollar, a looming recession in the United States, talks of bankruptcy for General Motors, WaMu insolvency debates, a credit crunch turning into global financial meltdown – it’s the end of the world!!!
Relax- Philip Morris International (PM) has got you covered.
Philip Morris International (PM) is a relatively new stock; it was spun off of Altria on March 28th 2008. PMI is the world’s largest producer of tobacco products, with 15.7 % of total global market share ex the US and 7 of the top 10 international cigarette brands. The company sold 850 billion cigarettes in 2007, with 48.5% of their revenue coming from the EU( have you ever been inside a European club, it smells like an ashtray), 22% coming from E. Europe, Middle east and Africa, 20% coming from Asia and 9% coming from Latin America.
I know what you are thinking – A cigarette company? Aren’t they being sued by everyone? Aren’t people gradually quitting those incredibly expensive, heavily taxed cancer sticks? Yes and Yes, those are both valid points about the American cigarette market. That is why I wouldn’t touch the American cigarette market. I want to be in the international cigarette market. Places like Europe where it is still “cool” to smoke. Places like the China, which comprises 1/3 of the global cigarette market. Places where I can watch a TV shoe without being told that smoking kills. Basically, I want to be where Philip Morris International is.
The company does not sell any cigarettes in the US, instead opting to operate in growing markets. PMI has an aggressive growth strategy which has caused the company to acquire, parts of Lakson and Group Carso, which are Pakistani and Mexican tobacco companies respectively. Philip Morris International also wants in on the largest and growing cigarette market in the world, China. In 2005 the company did a deal with China National Tobacco Corporation to establish and international joint venture to sell a portfolio of Chinese brands. PMI also licensed the production of Marlboro in China. As disposable income rises in the emerging markets so too will the demand for the high quality branded cigarettes that PMI offers. According to Wikinvest, “To meet the needs of its discriminatory customers, in addition to owning globally recognized branded cigarettes such as Marlboro, L&M, Philip Morris, and Chesterfield, PMI owns local brands such as A Mild and Diji Sam in Indonesia, Diana in Italy, and Assos in Greece to take advantage of established brands as opposed to marketing new brands in some regions.”
In addition to growing into new markets around the world, Philip Morris is also trying to achieve growth organically through R&D. According to Standard and Poor’s, PMI plans to use 1/2 of its R&D budget to develop next generation tobacco products.
The stock also offers a juicy 3.7 % ($1.84/share) dividend, though if you are going to hold PM in your 401K I would suggest reinvesting dividends. In addition to the dividend, PM has announced a two year, $13 billion share repurchase program (about 12 % total shares). Add that to a reasonable f p/e of 15.5 and a 5 year PEG of 1.31, and you have a very good long term prospect.
In addition to the numbers, we need to consider the overall addictiveness of cigarettes. People have a hell of a time quitting those things, which pretty much insures my favorite revenue model, the subscription based type. Not literally of course, but a de facto subscription model where consumers need to contiuanlly shell out more money to feed their nicotine addiction. More good news- the weak dollar will benefit PMI, as all of PMI’s revenue comes from outside of the United States.
Why is it Undervalued?
I think this is the most important questions prospective investors need to ask themselves about any stock. Since the market value is the “value” of the equity in the most accurate sense of the term, if investors can not say why the market is wrong, then they should not buy/short the stock. I believe PM is undervalued for a number of reasons. First is the fact that it is a relatively new stock to be traded independently of Altria group, and doesn’t have the visibility it deserves. But the main reason I think that the market undervalues PM is because people unfairly lump PM with other tobacco companies. Just as I think investors unfairly group ERJ with other Brazilian stocks, PM is unfairly grouped with domestic tobacco companies. The lawsuits, huge taxes and the declining market which domestic tobacco companies face are not the same challenges that Philip Morris International faces.
Risks
As with any investment, there are some potential risks to PM’s future price. Most notable among these is the risk that foreign countries will impose US like excise taxes on cigarettes. Moreover, cigarettes have a habit of shortening the lifespan of their patrons and as a result, PMI must continually bring on new customers to replace the dying ones, which believe it can.
Despite these risks I am still very optimistic for PM’s long term prospects. Now if you think investing in Tobacco companies is immoral, than this stock is not for you. But if you believe that people should have the right to choose whether or not they want to smoke, then I think Philip Morris International (PM) is one stock that should be in your portfolio/ 401K plan or both.
If you have any questions/comments/just want to tell me to go to hell – feel free to e-mail me at domenic@domenicstrazzulla.com
Also – never invest on someone else’s advice – do you own research.
Disclosure – Long PM
