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.

Philip Morris' tobacco portfolio includes well-known brands such as Marlboro, Longbeach, Virginia Slims, Benson & Hedges and many others. The company currently controls 15.6% of the international cigarette market, owning 7 of the top 15 brands in the world. Philip Morris International's headquarters are in New York, but the bulk of its operations are based in Lausanne, Switzerland. The $144.2 billion company operates over 50 factories globally, and employs a workforce of 75,600.

Daily Chart
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.

Other News About PM
Philip Morris International Seeks to Buy Influence Over Trade Policy
Philip Morris sponsors an exclusive Washington, D.C. event.
Will Tobacco Stock Gains Go Up In Smoke?
Do tobacco stocks still have significant upside? Other Stocks in the News
Buffett Successor Picked, But Not Named
Warren Buffett announces his successor.
When Will Apple Hit $1,000 a Share?
Is it truly possible for the largest company in the world to double its market share?

Copyright 2011 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Feb 28, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

Posted in ...