A couple of months ago, I wrote about how much I loved Altria (MO), and how I believed that it was one of the best stocks that you could purchase. While I still think Altria is a great company and a good stock, I now have a new favorite tobacco company, and potentially a new favorite stock. Philip Morris International (PM) actually spun off of Altria in March 2008 to become its own entity, and I am very upbeat about the outlook for this relatively new company. Philip Morris manufactures and sells tobacco products strictly outside of the United States. Some of its most popular cigarette brands include Marlboro, Parliament, and Virginia Slims. The company’s products are sold in around 160 countries, and it continues to expand its global reach.
I love this company for many reasons, and I believe that its stock price has much more potential than Altria’s to move higher. Throughout the rest of this article, not only will I point out why Philip Morris is such a great investment, but I will also prove why it is a better investment than Altria.
The first aspect of Philip Morris that excites me is its growth opportunities. Philip Morris has the whole world to sell to, and this freedom to sell its products across the globe will ensure high growth for years to come. While the cigarette market has been shrinking in some markets, such as Japan, and smoking bans and higher taxes have lowered cigarette demand in other parts of the world, such as the European Union, Phillip Morris has the unique ability to move its operations out of these areas and focus on places where cigarette demand is increasing. Philip Morris actually saw its strongest revenue growth in the first quarter of 2009 in emerging markets. The company grew its revenue in the Latin America and Canada region by 28% compared to the same period a year ago, and revenue also grew in Eastern Europe, the Middle East, and Africa by 6%. As the middle class in these developing nations become wealthier, they will have more money to spend on cigarettes, thus boosting the prospects for Philip Morris’ profits down the road.
Because Altria sells its products strictly in the United States, it does not have the ability to focus on selling in new and growing markets. Actually, cigarette demand in the U.S. has been steadily decreasing by 3% for a while now, thus leaving Altria with less and less demand for its core product every year.
Not only does Philip Morris have the ability to grow by expanding its operations to new regions and emerging markets, but the company also has a lot of room to boost its popularity and gain more market share. While Altria has a commanding 50.7% of the domestic cigarette market, Philip Morris only controls about 16% of the market for cigarettes outside of the United States. Philip Morris International is still a relatively young company, and I believe that it can greatly increase its market share up from 16%, while Altria has pretty much peaked at 50.7%. One of the main reasons that Philip Morris will have the ability to continue amassing market share in the international markets is because there are a lot fewer regulations for advertising cigarettes internationally. Altria, on the other hand, cannot promote its brands because advertising for cigarettes is illegal in the United States.
The topic of government regulation is another reason why I like Philip Morris more than Altria. The United States continues to enforce massive taxes and strict regulations on the tobacco industry. It seems like almost every month a new law against smoking is passed in the United States, and just recently, the U.S. imposed an additional 61-cent tax on every cigarette pack sold. There are also constant litigation fears that keep investors uneasy about investing in Altria, as the fear of a massive lawsuit against tobacco companies always seems to be in the process. Foreign governments, on the other hand, are usually more lenient towards the tobacco industry, as they realize that cigarettes have the ability to bring in a lot of tax revenues. So, Philip Morris has more freedom to advertise, it is vastly less concerned with lawsuits, and if any government wants to start getting tough on cigarettes with anti-smoking laws and higher taxes, Philip Morris always has the option of just ending operations in that country and moving into a new region that seems more profitable. Altria has no such option.
Another crucial factor to Philip Morris International’s future success has to do with the U.S. Dollar that is bound to become weaker as the U.S. faces more inflationary pressure. Basically, because the U.S. Government is printing so much money to keep our country out of a depression, many believe that there will eventually be too many dollars in the system when the economy rebounds. This excess supply of dollars in the system will make each dollar worth less compared to foreign currencies. And, because Philip Morris makes its money in foreign currencies and books its profits in U.S. Dollars, the company’s profits will be larger as a result. So, if you believe that inflation is a very real possibility in the future, which I definitely do, then investing in a company that does all of its business overseas is a very wise choice. Altria, on the other hand, has no exposure to foreign currencies, and thus will not be able to take advantage of the currency fluctuations. Instead, Altria will probably suffer due to the upcoming inflation, as domestic cigarettes will continue to become more expensive, and demand will continue to decrease as a result.
The positives for Philip Morris seem to never end. The company has extremely high cash flow, which will allow it to continue expanding without worrying too much about debt levels. The stock also pays a very high and very safe 5.05% dividend. Without including currency fluctuations, sales for the first quarter of 2009 rose 6.3% and the company’s EPS also grew 12.7% compared to the first quarter of 2008. The company was able to improve its profitability and obtain its highest quarterly revenue ever by raising the prices of its products. It is clear to see that Philip Morris has been unaffected by the global recession, as it continues to raise prices and boast higher revenues and profits as a result.
With such great growth prospects, looming inflation for the U.S. Dollar, and the great dividend and cash flow, Philip Morris seems to be a definite buy. It is currently trading at $42.81, and I believe it is very cheap right now. Having said this, I think an overall market pullback is on the horizon, so I would probably wait until it hits $40 to buy some shares. This is one of my favorite stocks, and I believe it would be wise to buy some shares and hold on to them for a long time.
Disclosure: Long PM and MO.