Seeking Alpha
Profile| Send Message| ()  

With increasing bans in the industry, Tobacco companies have to rely on price increase to boost revenue. The transformation of the American tobacco industry into a cartel due to "Master Settlement Agreement" has provided these companies with an opportunity to increase sales. This presents us with a great investment opportunity within the Tobacco industry.

The Tobacco industry recorded revenue of $35 billion in 2012 and this figure is expected to grow at 5% annually. Collectively, British American (BTI), Philip Morris International (PM), Imperial Tobacco (OTC:ITYBF) and Japan Tobacco own more than 90% of the Russian tobacco market where Russia is the largest hub within the global tobacco market. At the global level, Philip Morris has claimed the largest market share of 15%, followed by the British American Tobacco with a share of 13% and the Imperial Tobacco holds a share of 5%. On the other hand, Altria (MO) - the former parent of Philip Morris targeted to strengthen its roots in the U.S. and has met with success. It now holds almost 50% of the U.S. tobacco market. We will now evaluate these giants to identify a profit reaping pick.

Altria

After spinning off Philip Morris and Kraft (KRFT), Altria kept the U.S. market to itself and spent almost a decade strengthening its niches in that market. It has captured almost half of the tobacco market share in the US and is still determining strategy to enhance its market share. It has been a long time favorite for many investors due to its stable growth, low beta and high dividend yield. As per investors, it is as close to the "bullish no - brainer" as you can get in today's volatile markets.

Comparing Altria to the industry, the most lucrative incentive offered by this giant is its dividend yield and its dividend growth over the years. These traits have made it a long term portfolio gem for many investors on the stock market floors. Altria offers an annual dividend yield of 5.13% to its investors with dividend growth of 8.7%. Although Altria's Price to Sales and Debt to Equity values are above the industry average, all the other multiples are favorable as compared to the industry.

Key Stats

Altria

Ind Avg

Price/Earnings TTM

16.3

17

Price/Book

21.2

58.5

Price/Sales TTM

3.9

2.2

Rev Growth (3 Yr Avg)

1.3

-1.9

EPS Growth (3 Yr Avg)

10.2

-

Operating Margin % TTM

41.4

23.4

Net Margin % TTM

23.9

21.3

ROE TTM

122.1

108.8

Debt/Equity

3.9

1.8

Source: Morningstar

Philip Morris

Philip Morris International is the market leader of the tobacco industry that manufactures and markets world's no.1 brand: Marlboro. PM has jumped more than 100% over last 5 years providing a good return to its investors.

PM has a dividend yield of 3.71% and its dividends have been quite stable. The giant is expected to surpass the industry growth rate by more than 6%. The ratio comparison of Philip Morris is as presented below.

Key Stats

Philip Morris

Industry Average

Price/Earnings TTM

17.9

17

Price/Book

-43.9

58.5

Price/Sales TTM

2

2.2

Rev Growth (3 Yr Avg)

7.6

-1.9

EPS Growth (3 Yr Avg)

16.9

-

Operating Margin % TTM

17.9

23.4

Net Margin % TTM

11.4

21.3

ROE TTM

0

108.8

Debt/Equity

0

1.8

Source: Morningstar

British American Tobacco

British American Tobacco holds the second largest share in the global Tobacco industry. With the net margin of 25% this company offers a return on equity of 50.72%. The dividend yield of British American is currently 2.6% though analysts expect it to reach a level of 2.52%.

This giant is constantly exploring new horizons to expand its already huge market share. The latest news of its acquisition of CN Creative Limited has spilled hopes of many small manufacturers of e-cigarettes as the tobacco giant unleashes new growth opportunities for time to come.

Comparing this company with the industry, we see that it is overpriced considering the price to sales and price to earnings multiple, though its price to book value multiple lies well below the industry average. The ROE offered to the investors is well below the industry too but the debt to equity ratio is quite favorable than the average of the industry.

Key Stats

British American

Industry Average

Price/Earnings TTM

21.6

17

Price/Book

9.3

58.5

Price/Sales TTM

4.4

2.2

Rev Growth (3 Yr Avg)

8.3

-1.9

EPS Growth (3 Yr Avg)

8.4

-

Operating Margin % TTM

31

23.4

Net Margin % TTM

20.5

21.3

ROE TTM

39.6

108.8

Debt/Equity

1.3

1.8

Source: Morningstar

Imperial Holding

With its portfolio boasting brands such as Davidoff, Gauloises Blondes, West and JPS, this giant has a market share of 19.4% in Australia. With a diluted EPS of 2.18 this stock offers an ROE of 9.8%. Due to the recent price rally, there has been additional yield potential locked in Imperial, offering its investors an opportunity to reap better returns. This stock currently holds a yield of 4.35% which is expected to reach a level of 6.47%.

Comparing this giant with the industry, it seems quite overvalued on the basis of its price to earnings multiple though the value is quite suppressed when we look at price to sales and price to book value multiples.

Key Stats

Imperial

Ind Avg

Price/Earnings TTM

35.2

17

Price/Book

3.9

58.5

Price/Sales TTM

0.8

2.2

Rev Growth (3 Yr Avg)

24.7

-1.9

EPS Growth (3 Yr Avg)

1.3

-

Operating Margin % TTM

5.3

23.4

Net Margin % TTM

2.4

21.3

ROE TTM

9.8

108.8

Debt/Equity

1.4

1.8

Source: Morningstar

Conclusion

We now take a closer look at the key statistics of the companies under discussion:

Companies

Net Margin

Operating Margin

Share Price

Diluted EPS

ROE

Dividend Yield

Projected yield

PM

28.00%

44%

92.36

5.17

n/a

3.71%

3.68%

Imperial

2.30%

9.75%

73.58

2.18

9.8%

4.36%

6.47%

BA

25.29%

35.63%

107.68

6.34

39.60%

2.60%

2.52%

Altria

23.00%

42.90%

33.9

2.06

122.00%

5.13%

5.19%

Philip Morris is to be recommended in the light of all the evidence and facts presented. This global giant has outpaced its peers in operating and net margins and has experienced a growth rate higher than industry average over the years. EPS is above that of its peers and is a great sign. When we look at the announcement made in 2012 of their three year plan to repurchase their stock worth 1.8 billion from the market, the concerns regarding negative ROE are also eliminated. By making this announcement the company has shown confidence in its future prospects. This announcement also indicates that stock price will rise in future as share repurchases always reflect positively on the stock price. This company provides a valuable investment opportunity to investors that will leave them with a great return. Philip Morris is a great "long term buy".

Source: Philip Morris, Imperial Tobacco, British American Tobacco, Altria Group: Which Is A Better Buy For 2013?