Philip Morris International: A Buy Or A Sell?

May.15.14 | About: Philip Morris (PM)


PM has great growth opportunities in Asian countries like China and India.

PM plans to enter the e-cigarette business, and the e-cigarette market is expected to grow.

Acquisitions and joint ventures will improve is its sales and margins.

Attractive for dividend investors.

2013 was a difficult year for Philip Morris International (NYSE:PM). Its share price moved only 4.17% last year, from $83.64 per share to more than $87.13 per share. Year-to-date, the stock dropped more than 1.7%. Nevertheless, the stock still has a great upside potential.

PM has a strong hold of market share in the cigarette industry as the number one player. In 2013, the company held an estimated 15.7% share of the total international cigarette market outside of the U.S., or 28.2%, excluding the People's Republic of China and the U.S. Between 2010 and 2020, global consumer spending is expected to increase by $12 trillion. Spending on alcoholic beverages and tobacco will account for about 2% of this growth. The Chinese and Indian markets will provide a huge potential for tobacco manufacturers.

China and India will account for 19% and 8% of the world's spending growth through 2020, respectively. By 2020, the Chinese will spend one-fifth of that amount on alcohol and tobacco. Despite declining consumption in developed markets, world cigarette volumes is expected to increase over the next few decades due to rising consumption in China. Given its strong position, PM could benefit from growth opportunities in China and India.

Philip is seeing a lot of growth opportunity in e-cigarettes. The company plans to enter the e-cigarette market in the second half of 2014. The e-cigarette market has grown from thousands of users in 2006 to several million worldwide today. Many tobacco companies have entered the market to diversify beyond the declining traditional cigarette business. According to a survey, 10% of high school students tried e-cigarettes in 2012, an increase from 4.7% in 2011. By 2047, e-cigarette sales are projected to pass traditional cigarette sales. According to a forecast, global e-cigarette market will grow at a CAGR of 30.56% during the period of 2013-2018. The e-cigarette industry is expected to reach $110-$360 billion by 2023. Citi Bank projected sales to reach $3 billion by 2015, while Wells Fargo expects sales to top $10 billion by 2017.

A driving force behind the growth of PM is its joint ventures and acquisitions. In the third quarter of 2013, the company acquired a 49% stake in Arab Investors-TA. The deal will allow the company to secure a strong foothold in the Algerian tobacco market, which is the fourth largest market in Africa. The Algerian tobacco industry is expected to grow, as the government has not imposed any strict anti-tobacco legislation. Moreover, the deal will open business opportunities in Egypt and certain other North African and Middle Eastern markets, all of which will offer great growth opportunities.

PM also completed the buyout of 20% interest in its Mexican tobacco business, Grupo Carso, during the third quarter. Both the deals mentioned will help the company penetrate faster into growing markets and maintain sales and margins growth. Although PM has grown through acquisitions in the past, management has not given any guidance as to whether or not they are actively seeking or in the process of acquiring other companies.

PM also provides above average dividend income at 4.4%. The company paid its first dividend on June 2008 and has since increased it each year in a row. The ongoing growth of the dividend is one of its long-term goals. In the past six years, PM has increased its annual dividend payment by over 11% per year, which is quite nice. An 11% growth in dividends translates into the dividend payment doubling almost every seven years. The company's current dividend payout ratio is 71%, which leaves room for future dividend increases as the company grows its Earnings per Share.

Analysts are also bullish on PM. According to Yahoo finance estimates, the company will report revenue of $29.96 billion this year and $31.23 billion next year. EPS is estimated to be $5.18 and $5.64 in 2014 and 2015, respectively.

Risk Factors:

Although PM's stock has a strong and stable track record, there are several risks present with the purchase of this stock that investors should be aware of:

1) PM faces constant litigation due to the nature of its products.

2) Excise taxes are high already. Increases could result in higher prices and lower volumes.

3) Regulations like marketing restrictions continue to discourage the use of tobacco products.

4) Tobacco leaf prices can fluctuate and cause higher input costs that would erode margins.

Bottom Line

PM looks to be in good financial health and is in a position for continued growth. The cigarette industry is stable with inelastic demand for its products. Entrance into the e-cigarette business will drive its future growth. The company's joint ventures and acquisitions expose it to new markets and higher market share. The long-term goal of increasing the annual dividend along with the planned stock buyback will lead to an increase in shareholder's value. In my opinion, PM is an attractive for a long-term investment.

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.