In the investment world, Philip Morris (NYSE:PM) is known for two things: 1) being highly unpopular due to nature of its business, 2) delivering strong returns for investors. Indeed, those invested in Philip Morris saw their investments grow year after year, even in the face of economic crisis. In the last decade where most indexes were pretty much flat, Philip Morris delivered a return of 68% excluding dividends. This was the good news. The better news is: it's not too late to get in the Philip Morris train.
In the last decade, Philip Morris International's EPS growth (TTM) was fairly in line with its stock price appreciation, indicating that the stock price is fairly valued, however this is not bad news. The fact is, a stock doesn't have to be undervalued in order to see in capital appreciation because a company's growth will usually push its market price higher.
In 2011, Philip Morris bought local cigarette producers in Jordan, New Zealand and Australia and expanded its partnerships in Vietnam. These moves should result in stronger future growth for the company that separated from Altria Group (NYSE:MO) in 2008.
Competitive Advantages of PM
Philip Morris sells its products in 180 countries. Its fairly diversified portfolio of countries allows the company to take advantage of growth in emerging markets and make up for slowing markets. Marlboro, the company's best known brand, accounts for one third of the sales volume of the company.
Each year the company repositions itself to address the issue of heterogenic growth patterns in the world economy. For example, in 2009, 43.9% of Philip Morris International's revenues came from European Union countries whereas only 23.7% of the revenues came from Asia and 6% of the revenues came from Latin America. Today, only 33.5% of the company's revenues came from European Union, whereas Asian countries make up 35% of the company's revenues and Latin America makes up 7.3% of the revenues of the company.
In 2011, the company's sales increased to a volume of 915.3 billion units. This gives the company 16% of the international market share in cigarettes. PM's international market share would have been 28% if China was excluded from the analysis. Marlboro brand alone claims 9.2% of the international cigarette market. All in all, the company enjoys at least 15% of market share in 97 countries. In many countries, the company has its own distribution segment where the products are directly delivered to stores selling them.
The company outsources tobacco growing to local farmers in many countries including Brazil, Argentina, Greece, Turkey and Indonesia. Currently there is sufficient amount of tobacco production and the prices are pretty stable, helping the company's profit margins.
Philip Morris owns a total of 55 production facilities. Of those, 11 are located in European Union, 17 are located in Asian countries and another 17 are located in Americas. In addition, the company leases or uses 23 additional production facilities all over the world. This makes sure that products are produced in the same geographical area as they are being sold, limiting the shipping costs.
Because the company's products are mostly harmful to human body and the environment, the company usually faces lawsuits. As of 2009, there were 165 cases against the company. In 2010, this number dropped to 134 and in 2011 it was reduced to 110. The company also faces some legal cases in tax related issues.
In 2011, Philip Morris enjoyed an EPS of 23.7%, mostly thanks to improved profit margins, increased prices and unit sales growth. Usually in emerging markets, PM's products are more expensive than local products, however its brand name is well-recognized and many smokers don't mind paying premium for Philip Morris brand. As the emerging markets get wealthier, more and more smokers will be able to afford Philip Morris products, driving the growth of the company.
The company is generous with its dividend payments. The company has raised its dividend payments every year since its spin-off from Altria group in 2008. Currently the company's stocks yield 4% in dividends. Philip Morris International expects an EPS growth of 10% in 2012. In the last quarter, the company spent $1 billion on share buybacks.
The company currently enjoys a P/E ratio of 16 and P/Revenue ratio of 1.9. Out of the 13 analysts covering the stock, 7 rate it as "strong buy" and 2 rate it as "buy." As of right now, no analyst rates the company as a sell. The average price target on PM is $89, which provides limited upside from its current price of $85.
I believe PM is a good investment for dividend investors who want to add a relatively stable stock with growth potential to their portfolio. In the short term, the company might not see a great capital appreciation but it is likely to be one of the best long term investments out there. Another positive note about the company is that it is very stockholder friendly. I increased my long position in PM after the plunge of last month, which ended up recovering very quickly.
Disclosure: I am long PM.