Suffice to say, 2016 has been an uncertain year for the S&P 500. Although it is up by 2% at the time of writing, it has been down by as much as 10% due in part to concerns surrounding the global economic growth outlook. However, one stock which has performed well despite this uncertainty is Philip Morris (NYSE: PM),with the international tobacco play rising by 14% year-to-date and never being down by more than 2% since the turn of the year.
Clearly, Philip Morris' defensive appeal is a reason to buy it during uncertain periods, with its top and bottom line outlook being resilient and robust it is likely to beat the wider index during challenging economic times. However, beyond this defensive appeal, we think there are four other key reasons why you should buy Philip Morris right now and why its shares are set to rise and keep beating the S&P 500 moving forward.
The first reason is Philip Morris' exposure to fast-growing markets. While smoking is generally becoming less popular in the US, with 16.8% of US adults smoking now versus 20.9% of US adults in 2005, smoking remains much more widespread in the emerging world. For example, 80% of the world's 1 billion smokers now live in low and middle-income countries. This means that with Philip Morris having exposure to the developing world, it has a much bigger and more lucrative market to service than is the case for its US-focused peers.
And with world population set to rise by a third by 2050, the absolute number of smokers on a global basis is likely to keep on increasing year-on-year. This could act as a tailwind on Philip Morris's bottom line performance and act as a positive catalyst on its share price.
Philip Morris' exposure to non-US markets could also mean that it benefits from a weakening US dollar. The Federal Reserve has seemingly backtracked from its view that multiple interest rate rises were necessary in 2016 and even though we are now halfway through the year, there has been no further monetary policy tightening since December.
Looking ahead, the Federal Reserve looks set to adopt a more cautious than expected stance on interest rate rises and this could cause the US dollar to weaken, thereby providing exporters such as Philip Morris with a boost to profitability. In our view this boost could positively catalyse investor sentiment in the stock and help Philip Morris' shares to rise and to continue beating the S&P 500 moving forward.
We're also bullish on Philip Morris' prospects due to the strength of the Marlboro brand. It currently ranks at #26 on the Forbes most valuable brands list and with Philip Morris having the rights to the brand outside of the US, it could provide Philip Morris with high and yet stable growth moving forward.
In fact, we believe that having such a strong brand indicates that Philip Morris has a huge amount of customer loyalty which should mean that it is able to push through pricing improvements at a faster rate than its competitors, while also leveraging the Marlboro brand to boost marketing efforts on reduced risk products (RRPs). As such, having the Marlboro brand in its stable could prove to be a positive catalyst on Philip Morris' earnings and help to push investor sentiment, as well as its share price, higher moving forward.
On the topic of RRPs, we're bullish on Philip Morris' potential in this space. We recently discussed the partnership Philip Morris has with Altria in this article, with the combination set to reduce risks and profitability for both companies in our view. While not wishing to repeat what was discussed in that article, suffice to say we believe that the RRP space will be another positive catalyst for Philip Morris moving forward.
Of course, Philip Morris is not without risks. Regulations are becoming tighter in a number of key markets. For example, in the world's second largest cigarette market by volume, Russia, tax increases coupled with bans on smoking in public places are expected to cause volumes to come under pressure. And while emerging economies represent a strong growth opportunity for Philip Morris in our view, it is almost inevitable that regulations will tighten there just as they have done in the developed world in recent years/decades.
But even so, the opportunity for growth in Philip Morris' profitability and share price makes it a strong buy right now in our view. Positive catalysts such as the strength of the Marlboro brand, its defensive appeal, a weakening US dollar and a rise in the absolute number of smokers in the developing world (plus growth potential in RRPs) mean that Philip Morris looks set to rise in value and beat the S&P 500 moving forward. Therefore, buying it now seems to be a shrewd move.
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Disclosure: I/we 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.