Philip Morris Continues to Smoke On

by: Billy Fisher November 18, 2008 | about stocks: PM    

Billy Fisher

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The economy may be on the rocks, but business could not be better at Philip Morris International (PM).

Last month the tobacco company reported a 19.2% increase in adjusted diluted EPS as net revenue rose 17.5% on a year-over-year basis. In a time period when many companies have been cutting dividends and slashing forecasts, Philip Morris did just the opposite.

It upped the company’s quarterly dividend by 17.4% and reaffirmed its full-year forecast which is calling for adjusted diluted EPS growth of 19% to 21%. "Our excellent third-quarter results clearly underscore our ability to deliver against our financial targets despite anticipated currency headwinds and the current global economic turbulence," said Louis Camilleri, Chairman and CEO.

Over the past 6 months, shares of Philip Morris have retreated 27.1% versus a 38.0% slide by the S&P 500. I am not surprised by this outperformance as historically tobacco companies have held up well in down markets. I am surprised though by the extent of the sell-off in shares of Philip Morris and am not sure that it is entirely warranted. The stock now wields a dividend-yield of 5.6% and is trading at just 10.9 times forward earnings.

Some of the slide is understandable given an increasing level of fear of being in equities right now, but a 27% drop in 6 months as the company is checking in with double-digit top line and bottom line growth seems to be a bit overdone. I think that the current price of Philip Morris International presents a tremendous buying opportunity for long-term investors.

Given that it now operates exclusively outside of the U.S., the company does not face the same level of litigation risk that Altria (MO) does. Prior to being spun-off by Altria, Philip Morris International was a strong source of shipment volume for Altria and was the fastest growing segment of the business.

This trend of expansion has continued subsequent to the spin-off which took place in March of this year. Philip Morris reported third-quarter results that included double-digit revenue growth from each of its business segments. Shipment volume improved in each segment except for Europe. Volume growth in Canada and Latin America was particularly strong as it grew by 15.0% versus the year-ago quarter. These volume improvements are in stark contrast to Altria whose volume decreased by 4.8% over the same timeframe as it battles a contracting market for cigarettes in the U.S.

Forging Ahead with Buybacks

With Camilleri at the helm, shareholders can continue to bank on the company increasing shareholder value. It was Camilleri who engineered both the Kraft Foods (KFT) and Philip Morris split-offs. During the third-quarter he pressed ahead with a $2.4 billion repurchase of 44.8 million shares of the company’s common stock. Since May 2008, the company has spent a total of $4.5 billion to repurchase 86.2 million shares and it could buyback another $8.5 billion worth of shares between now and May 2010.

Not only do these buybacks send a positive signal to investors, but they also represent strategically sound usages of the company’s excess cash. As of September 30th, the company had $2.8 billion in cash on hand and an extremely healthy balance sheet.

Inelastic Demand

There is something to be said for socially responsible investing, but in terms of building a portfolio that is recession resistant, Philip Morris International is as good as it gets. The fact that its customers are addicted to its products makes for a dream business model. Even Altria has been able to compensate for drops in its shipment volume in the past via price hikes. For Philip Morris International, it could be some time before the company even has to begin to face this same challenge.

Disclosure: no positions.

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This article has 3 comments:

  •  
    Nov 18 06:53 AM
    You forgot to mention the strong dollar. This is what has been keeping the stock below $40/share in my view. That said, even if forward earnings projections are coming down a little, it still looks cheap. Plus, the company can buy back more stock which will help offset the affects of the weak euro. PM will continue to raise their dividend at least 10% annually and that means in five years the dividend will be about $3.50. Will PM stock remain flat over this time and eventually yield over 9%? I think not. This company is a license to print money and investors with a 5 year time horizon will be nicely rewarded.
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  •  
    Nov 18 11:57 AM
    Quote: Given that it now operates exclusively outside of the U.S., the company does not face the same level of litigation risk that Altria (MO) does

    I think you are underestimating the litigation risks for PM.
    Any country that PM operates in can sue it at any time.
    There could be years and many cases to look forward to for PM in many different jurisdictions...sure sounds potentially messy and ugly to me.
    Reply | Link to Comment
  •  
    Dec 01 02:09 PM
    when times are good.....people drink and smoke but when times are bad....they smoke and drink...............MO...
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