There are only two stocks I own today, and Philip Morris (PM) is one of them. Unfortunately it has become one giant currency play of dollar versus all other currencies.
The stock is listed in dollars. Against that, 45% of EBIT is in Euros (Even Trichet was forced to comment at Davos that Euro won't disintegrate - remember Milton Friedman said Euro won't survive its first recession - now we shall see.), 10% is in ruble (crashing), another 10% from Ukranian hryvnia and turkish lira (crashing even more), 25% in Sterling, Polish Zloty, Latam currencies, Indonesian rupiah, Aussie dollar, Saudi Riyal and Egyptian Pound (most of them are weak), and 10% in Yen (the only saving grace).
It is unlikely that PM will show any EPS growth in 2009, or even in 2010. If the dollar continues its rampage, especially against the EM currencies (and I think it will) we can even see -10% EPS in 2009. So, should I sell?
I would have sold this, but I am trying to test a theory of long-term investment with this stock. It is as follows:
a) Forget EPS growth. There are hardly any companies that will show EPS growth in the next couple of years (except Amazon (AMZN
) of course). If one can be convinced that the EPS of a company is not going to collapse like that of a steel company, one needs to look at some other things. I am pretty sure that PM's EPS won't get cut in half, so I am looking at these other things.
b) The most important of these other things is - does the company have the financial capacity to do some deals that will help it solidify its moat, so that whenever the tide turns three, four, five, six years away, it is in a dominant position. PM has a very strong balance sheet. Can it take advantage of the situation that unfolds in 2009 to acquire competitors in Russia or Indonesia or LatAm who might face trouble?
c) Purchasing power parity: Yes all the EM currencies are depreciating against the dollar today. But doesn't it imply that there is one year of 10%-20% type inflation out there in all these countries somewhere in the next five years, in which PM's EBIT will jump by 25% in one year in EM countries and take care of some of the lost EBIT of previous years (and no, EM currencies need not depreciate further in that high inflation year - if it is just high inflation and not hyperinflation). Besides, if there is a non-zero probability of hyperinflation in U.S., it definitely is non-zero everywhere else.
Suppose Euro crashes and is replaced by another currency. There will be upheaval, revolution, war etc etc. At the end of it all, it is unlikely that we'll get an Ipod for $99 in the U.S. and a $29-equivalent in Europe. One big reason why the pound had to fall at some time last year was - everything was just so expensive in London vs. Paris or New York.
If one believes that all currencies, including dollar, are risky because of what central banks and governments are doing, then the best defense is not bonds or even gold - it is stocks. After all, companies can raise prices to offset steep depreciation of currencies. But one needs to be very careful. A lot of companies will go bust - especially companies running asset-liability currency mismatch. One needs to buy stocks of companies that will not only survive the recession, but will take advantage of their immense balance sheets to snap up competitors on the cheap. So the M&A track record of management is very important going forward.
I think this is one big reason why Buffett wrote that open letter in Oct, where he said that he is buying stocks because of the policies he expects governments worldwide to take.
One good question to ask is - what is the true EPS of PM if all currencies were trading on PPP basis. Because remember, last year's EPS of $3.34 benefited from dollar depreciation against the Euro and EM currencies in 1H08 - which one can argue was also excessive. So, some of dollar appreciation against EM currencies is just a return to normality.
Timing-wise, one can argue that I should sell today and buy close to that time when we are close to inflation. But I need to test my theory with some stock, and I have chosen this one.
The other problem with PM is - cigarettes are the easiest things to tax, and don't the governments need tax revenue? So let's see how this turns out.
Disclosure: Long PM