Philip Morris (PM) is the leading tobacco company in the world. I am bullish on PM, as the company has a lower PEG of 1.4, impressive ROA of 24%, a decent dividend yield of 3.7% and robust growth projections.
Given the rising health concerns and increased regulations, the U.S. tobacco industry has been going through difficult times as volumes for traditional cigarettes are falling. The tobacco companies are heavily dependent on price increases to grow their top line, whereas cost cutting initiatives and share buyback programs have been fueling bottom line growth. The following table shows the decreasing volumes for the tobacco industry of the U.S.
Source: Company Reports
PM is among the best in the industry. The company has a strong global market share of approximately 29% (excluding the U.S. and China) and has delivered healthy financial performance in the past. Also, the company has well diversified geographical sales and profits. A well diversified revenue base helps PM to benefit from superior growth rates as compared to its peers in the business. The following are the sales and profit break down according to different geographical regions for PM.
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Source: Annual Report
As is the case with the industry, PM has also been suffering from volume decline and is primarily relying on price increases to grow its sales. The company's price increase efforts have been successful in offsetting the declining cigarette volumes. In last four years PM has experienced organic sales growth of 6% on average. The table below displays the price, organic volume and organic sales growth for PM in last four quarters.
Source: Quarterly Reports
The volume decline of 7% in last quarter, 1Q 2013, was higher than what was expected by the analysts. However, the company was ultimately able to grow its organic sales by 3% due to very strong, 10%, increase in prices. As the company has significant international market exposure, it is exposed to currency headwinds. In the recent quarter, 1Q 2013, PM missed earnings consensus by 5 cents mainly due unfavorable currency movement. However, last quarter earnings were 3% higher as compared to corresponding period last year.
Another tool used by the company to expand its bottom line apart from price increase has been a share buyback program. PM completed its three year buyback program in July 2012, which worth $12 billion. Another share buyback program of $18 billion was announced in August 2012, and under this ongoing buyback program PM repurchased 16.7 million shares by spending $1.5 billion in 1Q 2013.
The aforementioned efforts, price increase and share buyback, undertaken will help to grow the company's top and bottom lines in the near the future. However, PM should explore and work aggressively towards alternates to traditional cigarettes. One of the alternates to traditional cigarettes is the electronic cigarette (e-cigarette), which provides significant market and growth opportunities to the tobacco industry. According to Euromonitor estimates, the global e-cigarette market was worth more than $2 billion in 2012. Some analysts also believe e-cigarettes can take over traditional cigarettes markets in 10 years.
Earlier this month PM jumped on e-cigarette bandwagon, following the industry foot marks to work on alternate to traditional smoking. PM has yet to provide details on its plans related to e-cigarettes. Altria (MO) last week announced that it will introduce its first e-cigarette brand in August this year.
The outlook for the company seems to be positive, given PM's impressive past five years growth rate of 12.5% on average and robust growth rate of 11.5% per year for the next 5 years forecasted by the analysts. For the year 2013, PM provided diluted EPS guidance of $5.55 - $5.65 including an adverse impact of 19 cents due to adverse currency movement. The EPS guidance for 2013 reflects earnings growth of 10% - 12% (excluding currency) year on year basis.
Reynolds American Inc. (RAI)
British American Tobacco plc (BTI)
Lorillard, Inc. (LO)
Source: Yahoo finance
PM has a lower PEG is comparison to its peers as shown above, which indicates PM offers cheap growth as contrasted to its peers. Also, PM has a remarkable ROA of 24%, higher than MO, RAI and BTI. Furthermore, analysts are anticipating a high next five years growth rate of 11.5% per annum and PM has a diverse geographical revenue base. Therefore, I am bullish on PM.