Philip Morris: The Trend Is Your Friend

| About: Philip Morris (PM)

In my article, "Tobacco Stocks: Defensive Play In Uncertain Times," I already mentioned Philip Morris International (NYSE:PM) as one of the best stocks to own if you want a steady return in stormy times.

Year to date, the stock rose about 30%, one of the star performers within the outperforming Consumer Staples sector. Very strong pricing power, resilient volumes, guidance lifts, healthy free cash flows, a USD 5 bln share buyback programme, rounded off by a market sentiment favouring defensive stocks, have been the driving force behind the strong performance.

Given PM’s unchanged strong fundamentals and the still favorable market sentiment, the stock still has room to rise further.

Philip Morris International, having been spun off from Altria Group (NYSE:MO) since the end of March 2008, is the world's largest non-state-owned cigarette company with a global market share of around 26% (excluding China). Currently, European Union is the major profit contributor for Philip Morris. Although EU accounts for only 30% of PMI's volume, the portion EBITA are disproportionately high thanks to the region's higher prices and high margin levels (EBITA margin about 50%).

As mentioned in my previous article, emerging markets is the growth engine in terms of volume and profitability. Expansion potential within these countries remains high, as a continuing raise in disposable income makes international cigarettes increasingly affordable for local consumers.

Generally, the global tobacco industry faces increasing excise taxes, as many governments are feverishly seeking for sources to fill the deep holes in their budgets. Cigarette taxes were hiked in many countries, and cigarette makers have reacted with price increases, which have resulted in volume declines. But operating profit and cash flow remain strong as pricing strength seems to be able to offset volume weakness.

PMI’s high savings potential, strong free cash flow and its less investment-intensive business support a shareholder friendly payout policy. Apart from a high dividend yield the company implemented a USD 5 bln repurchase plan in 2011 after having finished a similar one in 2010.

In an environment where many consumer companies are facing serious input cost inflations and thus significant margin pressure, Philip Morris stands out with double-digit EPS growth, continuing margin improvement, a healthy dividend yield, and a USD 5 bln share repurchase plan.

Q3 Results

PM's net income in Q3 surged 31% year-over-year to USD 2.38 bln, and EPS was up 37% to USD 1.37, greatly exceeding consensus estimates of USD 1.24. Sales rose 26% to USD 8.36 bln, vs. expectations of USD 7.51 bln. OCI (operating company income = EBITA) gained 29% with margin up 100 basis points (bps) to 44.9%.

Organic sales growth was an inspiring 15.7% with volume contributing 4.4% and pricing 11.3% (!!). Emerging Markets were the driver with Asia up 39%, while other regions were also firmly in the positive territory. Even the EU, where a price increase of 5.7% offset a smaller-than-anticipated volume decline of 3.5%, reported organic sales growth of 2.2%.

On an organic basis, EBITA margin was up 380 bps at the group level, with all regions having posted margin gains. Asia stood out again with EBITA margin up 1120 bps to 47%.

The company narrowed its FY11 EPS guidance to USD 4.75-4.80 from USD 4.70-4.80, compared to current consensus view of USD 4.74.

The company bought own shares of USD 4.35 bln in the first three quarters, with only USD 650 mln left under the current authority for Q4. There seems a considerable scope for the company to exceed its full-year repurchase target of USD 5 bln.


Investors looking for defensive stocks that pay a high and secure dividend can buy Philip Morris International.

Next Dividend payment n.a. Earnings Announcement Date

(previous year)

Exp. Dividend (curr. year) 2.82 USD Earnings Announcement Date

(current year)

Dividend Yield (%) 3.73% EPS (curr. year) 4.85 USD
Price/book ratio (curr. year) 39.39 EPS (next year) 5.25 USD
ROE (prev. year) 160.62% P/E (curr. year) 15.59 USD
YoY EPS growth (curr. year) 25.32% P/E (next year) 14.40 USD

Disclosure: I am long PM.