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Philip Morris International (NYSE:PM) is thought of by many investors, as the fastest growing and most lucrative tobacco company in the world. Spun off from Altria (NYSE:MO) in 2008, the company has become the single most important tobacco company in the market for cigarettes, controlling 16.3% of the global cigarette market, greater than that of its largest peers, British American Tobacco (NYSEMKT:BTI) 13% and Japan Tobacco at 10%. Worth noting is that if you exclude China and the U.S., two countries where Phillip Morris does not operate, then the company theoretically owns 28.8% of the global market share.

However, many investors are cautious about investing in a tobacco company, especially one that makes up such a large part of the international market, as tobacco production and consumption can be viewed as unethical and dangerous. Moreover, tobacco opinions are changing around the world and within the majority of countries, smoking is on the decline. Additionally, many cigarettes companies are facing huge fines and legislation to compensate consumers who have suffered from tobacco related illnesses.

So, with this in mind what are the pros and cons for investing in Philip Morris and is it worth the risk?

Pros

By far the best reason to invest in Philip Morris is its market beating returns and the huge amount of cash that it is returning to shareholders. Although, the company only currently offers a dividend yield of 3.6%, lower than its major peers, which offer an average yield of 5%, Philip Morris is undertaking some of the largest stock buyback programs in the market, and recently announced a $18 billion share repurchase program that will, over three years, reduce the company's shares outstanding by 11%.

The other main reason that investors should be attracted to Philip Morris is the company's rapid earnings growth rate, which does not appear to be slowing down. The company's net income has grown 39% over the last four years, or about 10% a year. Moreover, Philip Morris's earnings per share have grown even faster as the company has been buying back stock; during the past four years the company's EPS are up around 60%, significantly outperforming net income growth.

Cons

Obviously, the biggest downside and risk for investing in any tobacco company is the declining consumption of tobacco around the world due to health concerns. Additionally, there is a huge risk to Philip Morris' sales from the black market for tobacco products, which is growing rapidly as consumers search for cheaper cigarettes in these hard times. In particular, according to Philip Morris, the black market for tobacco products reached a record size during 2012, although it is unknown what exact impact this will have on the company.

The other major risk to the company is a strong U.S. dollar. You see, Philip Morris does all of its business outside the United States, as when the company was spun off from Altria back in 2008, the international tobacco operations became Philip Morris intentional and the domestic tobacco operations became Philip Morris USA, which is still part of Altria.

Anyway, as all of Philip Morris's sales are outside of the U.S., its products are sold in many different currencies, but the company reports its earnings in U.S. dollars, which means that Philip Morris' earnings are highly dependent on currency movements. In particular, the strong U.S. dollar really hurt the company in the first quarter of this year, denting the company's EPS by 6%. Furthermore, during the past year the strong dollar has reduced the company's earnings on average, 6% per quarter.

Future outlook

Of course based on its historic performance, it would be easy to say that the outlook for Philip Morris will be good. Although, there are some risks the company could face, as I have mentioned above.

That said, even though risks exist, we believe the outlook for the company is good. As tobacco products are addictive, Philip Morris is able to increase its prices in order to offset declining sales. In addition, the company, as of yet has no sales within China, which is a market we believe could be highly lucrative for the company when it finally opens up.

Moreover, Philip Morris has committed to repurchasing $18 billion of shares during the next three years, which should force up EPS 11% (due to the reduced number of shares in issue), indicating that even if the company's revenue does not grow, earnings per share will move higher, which should benefit the share price.

In addition, analysts predict that the company will earn $6.30 a share this year - growth of 12%, putting the company on a forward P/E ratio of 15, which is about the same as the rest to its peers in the tobacco sector, having said that, as the company is achieving such a high rate of growth, the shares should be trading on a high P/E multiple in relation to the other companies'. This is in part because of Phillip Morris' impressive performance over the last five years, outperforming many major peers on a returns and margins basis.

Phillip Morris

Altria

Reynolds America (NYSE:RAI)

Lorillard (NYSE:LO)

British American

Five-year Average Return on Investment

43%

24.5%

12.3%

102%

17.4%

Five-year Average Operating Margin

42%

37.5%

28.8%

41.7%

33.2%

Conclusion

So overall, although there are some risks facing the company, Philip Morris is still growing rapidly and its highly cash generative operations mean that the company is able to return huge amounts of cash to shareholders. Philip Morris is still a good investment, offering the prospect of large future returns for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: The Bull Case For This Tobacco Company