Philip Morris (PM) is Still Smoking Hot
Over the past twelve months, shares of tobacco giant Philip Morris (PM: Charts, News) have rallied over 33%, owing to its unstoppable popularity in emerging markets despite new smoking bans in various countries. The company, which was spun off from the Altria Group (MO: Charts, News) in 2008, is not responsible for its American operations - these are handled by Altria - but rather only its international ones.
Last Thursday, the company reaffirmed its full year 2012 earnings guidance between $5.25 and $5.35 per share, in line with Street expectations of $5.29 per share. Like many other multinational corporations exposed to emerging markets, the company sees a continuation of growth in Asia, Eastern Europe, the Middle East and Africa offset by losses in Western Europe, Latin America and Canada.
In the most recent quarter, the company's sales volume in Asia, its strongest segment, surged 10.5%, led by double-digit growth in Indonesia, Japan and South Korea. Revenue surged 25.7%. While regulation isn't as strong in Asia as the United States, certain countries, such as Japan and Taiwan, have increased their excise taxes on tobacco products in the past two years. Excise taxes are the Achilles heel of the tobacco industry, since they are more likely to be approved than traditional forms of taxation, due to the perceived "unethical" nature of the tobacco business. Many cities in Asia have also enacted limited smoking bans as well to curb public smoking.
Meanwhile, China's lucrative cigarette market remains firmly under the control of the government-owned China National Tobacco. Philip Morris has a distribution pact with China National Tobacco from Altria that allows it to sell its cigarettes in the mainland. In exchange, Philip Morris uses its distribution network to circulate Chinese cigarettes around the Asia Pacific region. The company receives licensing fees from China National Tobacco, but not direct revenue.
Eastern Europe, the Middle East and Africa, which report their sales together, posted slight sales growth of 0.2%. Meanwhile, its Latin American and Canadian segment posted a 7.4% decline primarily due to lower volume in Mexico. Overall economic malaise and inflation in South America were also contributing factors. Analysts believe that based on Philip Morris' history, the company will attempt to grow its market share in Latin America through more acquisitions of local brands to offset its losses.
Western Europe surprisingly fared slightly better, reporting a 7.1% sales decline due to weakness across the continent. France, Germany and Italy posted single digit declines, but Spain's sales plunged 17.7% due to a declining economic environment coupled with a total indoor public smoking ban, enacted in January 2011. Anti-smoking bans in public places has notably impacted other markets, especially in the United Kingdom, where patrons are no longer allowed to smoke in bars.
Philip Morris is in the middle of a share repurchase program, buying up nearly $8.4 billion in shares since May 2010, with another $3 billion left to go. This reduction of outstanding shares could help shares firm up in the face of unpredictable macro headwinds. Due to its large market share, the company has significant pricing power and the ability to grow easily and organically through acquisitions of local brands. Since cigarette products are all fundamentally similar, acquisitions have been smooth in the past, with few concerns regarding acquisition indigestion.
Shares currently trade at 14 times forward earnings, lower than its historical P/E of 17, signifying more upside, but its price-to-sales ratio of 1.9 is weaker than the industry average of 2.5. Philip Morris pays a 3.71% quarterly dividend, making it a popular choice for income investors.
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